In our autumn newsletter we quoted the words of Franklin D Roosevelt, that “the only thing we have to fear is fear itself". It now seems as though those words were indeed prophetic as we face one of the most protracted downturns in global economic activity for decades. The problems of the worlds banking systems have been exacerbated by speculative and fearful selling.
Given the turbulence of investment markets over the past 6 months, we felt that it has been difficult to give general comment, beyond what you hear in the media that would be of much use to you. The markets have moved so suddenly that often our observations may well have been out of date before they reached you. However, we feel that as your advisers, you may well expect to hear our view on matters and also to have access to other comment about market conditions as well.
Having considered the views from a variety of sources, it seems likely that global stock markets will continue to experience volatility for the foreseeable future. This is indeed due to the ‘fear phenonemen’ and the short-termist approach of many investors. Recent research about the New York stock exchange by Societe Generale* showed that the average holding period for shares had fallen from nine years in the 1950’s to a period of about 6 months now. This trend has led to an understandably short termist view by the speculators who adopt this approach. Our view (and that of the fund managers we recommend to you) is that investments in shares should be a long term policy and that selecting investments and holding for the longer term (5 years plus) in sustainable and ethically run businesses can prove good value. Regrettably, unless aspects of this current market such a ‘short selling’, are restricted or regulated, then we are likely to continue to see short term ‘spikes’ in market values. This however, does not change the long term merit of equity based investment and we will continue to recommend this strategy where appropriate.
At ethicalfutures, we have recognised the issue of volatility for some time and have sought to ‘asset-allocate’ your investment portfolios over a range of investment classes, such as cash,
One year sector average performance, offer to bid , income reinvested for Money Market, Sterling Corporate Bond, UK all companies, Global Growth & Property
So what to do?
Our recommendations are that investment clients should continue to hold their portfolios and ensure that they are appropriately allocated to meet their needs, taking into account the characteristics of the various asset classes.
If you hold savings in deposit accounts you will have seen a near 80% drop in interest over the past 6 months. Interest rates are likely to stay low for some time although they could start to rise again if the recent process of ‘quantative easing proved to be inflationary. It’s therefore worth keeping an eye on rates and seeking better terms. We advise caution about some of the terms on offer and whilst the government has shown no indication that it would let a bank actually fail, it is prudent where possible to spread funds around so that you are not fully exposed to one institution. Currently, Cooperative Bank offer the best ethically screened rates but you can obtain higher deposit from other building societies.
As regards market linked and asset backed investments; at the risk of being repetitious, our view remains that unless, you desperately need your money, then you should stay invested. Regrettably, share based investments have fallen significantly and this means that cashing in at this point will only serve to crystallise a loss. It is notoriously difficult to time purchase of assets in a market for the ‘optimum’ price and considerable research has shown that it better to stay invested for the long duration rather than to dip in and out.
Corporate bond funds have proven less volatile but have fallen by more than usually associated with this close. This is due in part to the credit crunch and the markets inability to accurately assess the financial strength of the issuing companies. However, in light of the dramatic fall in deposit interest rates, the income yield on corporate bonds (currently at 5.00%+) is looking increasingly attractive and market opinion suggests that this asset class could be the first to recover, although a bumpy ride remains likely.
Property (both commercial and residential) remains depressed in value and yields are depressed due to the excess of supply. However, these are by their nature long term assets and will continue to provide potential value n the longer term. Investment in property funds remains possible but clients should be aware that they can be illiquid and at times you may not be able to withdraw funds. For clients considering purchase of a property for their personal use or to let then please note that mortgages are increasingly difficult to obtain. Not only do you need to have 25% deposit to obtain even marginally competitive rates but there are also signs that funds are being rationed by a number of the major players. To alleviate this problem, we need to see lenders focusing more on lending than shoring up their balance sheets. Recent government activity has sought to reduce the concerns about ‘toxic debt’ and try to free up inter-bank lending to improve the flow of money but it will take some time to see if this has worked.
What hope for ethical investments in the future?
It now appears that the global economy is moving into a prolonged period of recession. Initially ethical funds fared better than mainstream due to the lower exposure to banking and other financial stocks. However, it’s fair to acknowledge that in a period of recession, the smaller to medium sized companies that make up the bulk of ethical investments are having a tougher time. Smaller companies are seen as less resilient and hence prices get marked down more aggressively. Whilst mainstream fund managers may take flight (some what cynically) to ‘defensive stocks’ such as tobacco, food and drink – because people continue to eat and probably drink and smoke more n times of stress – these options are not available to, nor sought by, the ethical fund managers.
So whilst short term performance of ethical investments may suffer, the funds will look to the longer term and are arguably better placed to benefit from the various stimulus packages being put forward.
Both resource and political issues are combining to create long term potential in green and environmental business. Whilst there will continue to be short term demand for fossil fuels the ‘peak oil’ risk is undeniable and this is now starting to inform government thinking. The impetus that President Obama’s election has given to the green agenda is undeniable. In an attempt to stimulate his own economy and to look the resolving longer term fuel security issues, the Obama initiative and our own countries plans to meet EU 2020 targets creates an excellent stimulus for investment in environmental technologies. These are investments that have long been significant elements of ethical funds and where the fund managers can apply their expertise to stay ahead of the pack.
However, ethical investment is not just about green and environmental issues. Given the excesses of bonus culture and executive hubris that we have seen, I hope that we will see a much stronger push for stricter corporate governance. As investors, we have a right to expect that businesses are run for our long term benefit and not just to reflect the bonuses payable to a small group of senior executives. In recent years, the city has kept quite quiet about this, satisfied by short term investment returns. However, having now seen the outcome of such excessive behaviors I am more confident that the issues of long term strategy, how a business is run my management and how they are rewarded, will come under much closer scrutiny. The more funds that we can place under an ethical mandate the better to help force this agenda.
Looking forward
Though we expect continued volatility in the markets we feel that the wide range of investments that we offer will still be relevant for the longer term. Certainly we are looking at means to improve the investment experience for our investors and for some this will mean reviewing asset allocation, for others considering ‘phasing’ investments into the market rather than placing funds in all at one time. Our view is bolstered by the fact that ethical investment continues to be a dynamic field with new opportunities regularly appearing. Many of these opportunities will offer greater diversity by offering investments in new and alternative investments such as micro-credit, sustainable forestry, sustainable agricultural development, recycling and renewable energy; investments with a real double dividend on investment and social return.
At ethicalfutures, we are optimistic for the future. For a while, at the end of 2008, things were quiet but as the New Year dawned we realised that, for our clients, life goes on. People still change jobs, move homes, get married; have babies, unfortunately some die and others inherit. Life events are what we at ethicalfutures are about and we shall continue to be there to help you make the right financial decisions as life goes on.