Written by Patrick Ingram, Retirement Specialist 19th November 2019

When exploring the shift in attitudes towards ethical portfolios, we usually take one of three starting points, looking at things from a client’s point of view. First, there is the confirmed ethical investor who, in principle, does not want their money to support industries they may disapprove of. Our range of portfolios could cater well for investors with this sort of outlook.

Next, it seems more and more, especially younger, savers and investors who want their money to promote the social changes which will defend the planet. It’s a widely held opinion, supported by science, that we are facing a climate change emergency. The commercial logic of investing to help to prevent this is very strong. As we speak, it is creating meaningful investment opportunities – particularly around new technologies.

Finally, when shaping multi-pot retirement plans, we see advisers considering our ethical solutions for that ‘legacy pot’, intended to find its way down to succeeding generations. There would seem to be an obvious overlap between the sentiment to defend our eco-system and the impulse to sustain your family’s very long term future.

But what about taking the next step? Could an ethical portfolio sit right at the heart of a retirement plan?

An analytical view

Like all the flagship Parmenion investment solutions, our Ethical portfolios have been mapped to the Hymans Robertson ESS (Economic Scenario Service) in our Income Modelling Tool, IMT. This gives an up to date, independent, institutional standard analysis of how our investment portfolios are likely to perform, in the opinion of a firm of consulting actuaries. How do the Ethical portfolios stack up against our flagship Strategic Active portfolios?

A sticky patch for all

It would be nice if we were back in the strong phase of Quantitative Easing (QE), five or so years ago (QIR, Q3 2019), with annual returns of 8% anticipated on mid risk portfolios. But today the real terms risk free rate on 5 year UK government bonds is negative, at around -2.5% (bankofengland.co.uk, Oct 2019). It means that those balanced portfolios with the reduced volatility which clients favour are unlikely to be rising strongly in real terms given their substantial bond weightings. QE of course made bonds more valuable. Market expectations from equities are around 7.7% before inflation (market-risk-premia.com, 2019). Charges can be modelled at around 2% if you are carrying out a rough check in total. The outcome? A central scenario of broadly flat returns in real terms over the next decade. Inflation may well become the swing factor.

Nothing in our analysis suggests Ethical portfolios will perform in any materially different way over that time frame compared to our flagship Strategic Active solution, at an equivalent risk grade. You can quickly verify this for yourself using IMT on the platform portal.

These graphs are taken from Parmenion’s IMT and are intended for use by financial advisers only. It is important not to interpret its outputs as guarantees of future outcomes. Please see below for key assumptions.

Model assumptions

The IMT is a model, underpinned by sophisticated stochastic and longevity distribution models, designed to indicate the relative likelihood of plan outcomes. These models are based on a male, born 1.10.1959 in of average health, living in BA14 6QJ. He has £100,000 invested in either Ethical A or Strategic Active. He will be taking a £4,000 a year withdrawn from age 65. All IMT analysis are in constant £s. Adviser charges are 1% initial, 0.5%pa ongoing. Please see the IMT Technical Guide for further details.

Our observations  

Our observation therefore is that Ethical portfolios are likely to cope as well with drawdown, and with accumulation, as our core Strategic Active portfolios. We see no reason to rule them out of a central role in retirement planning, specifically as drawdown portfolios for clients with a personal position on the ESG agenda or a desire to support it. The Parmenion SIPP now has over £125m invested on behalf of over 1,000 customers. And we already see over 100 accounts using Ethical portfolios for drawdown.

Could there be upside in Ethical?

It is good to know that Ethical portfolios may have exclusions that suit the outlook of a particular investor and that there is nothing intrinsic to the construction of Ethical portfolios which means conventional ones must do better. The IMT analysis from Hymans Robertson shows Ethical to perform at least as well as Strategic Active looking ahead ten years. But for investors optimistic about clean energy, the commercial opportunities in recycling and new materials technology and new ways of producing our food, Ethical investment could mean getting in on the ground floor. Exxon Mobil, Shell, BP and Total have combined 2018 revenues over US$1trillion (wikipedia, Oct 2019). Where will the petrochemicals industry be in 30 years time and who will we be buying our energy from in 2049?

The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”

Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.