September 2019

This is a huge question and an important one. Many of us want to put our capital to good use whilst also reaping financial rewards along the way, and several voices in the financial world claim this is possible. Yet many people would argue that investing, by its nature, works against the cause of equality. Who is right?

At WMM, many of our clients have expressed a desire to know more about the relationship between investing and equality. As financial planners covering Oxford (a University city), we understand this subject is important to many people who live here; as well as across the UK. Here is our brief attempt to articulate our perspective.

Please note that this content is for information purposes only, and should not be taken as financial advice. To receive such advice please contact one of our independent financial planners here in Oxfordshire.

Defining Inequality

Of course, before we can judge whether investing broadly helps or hinders equality, we need to agree on what “equality” means. This is by no means an easy task; indeed, entire PhDs and academic careers have been built on answering this question!

For instance, does equality primarily refer to individual income equality, or equality of employee influence over strategic decisions in the workplace? Does it refer to gender equality in the company boardroom, or to ensuring that no single company can dominate a particular market and so prevent other companies from realistically getting a look-in (e.g. think of Google and the UK search engine market, where in 2019 no other business comes close)?

Moreover, does equality mainly refer to equality of outcome or equality of opportunity? The university debate is a classic example here. For instance, should everyone realistically have the same opportunity to go to university if they so choose, or should the decision be governed by academic ability or wealth?

Rather than try to answer all of this definitively, here we will be focusing primarily on investing regarding two main “equality of outcome” areas: income equality and gender equality.

Investing & Gender Equality

It’s worth noting at this point that some people will simply never see investing as compatible, or helpful, with regards to equality. For instance, Marxist thinking typically perceives investing as inherent to the capitalist system, which is fundamentally incapable of creating a fair society. We understand these views, but assume that if you are reading the thoughts of an Oxford financial adviser, then your political-economic views fall at least somewhere more towards the centre ground! Certainly, we at WMM believe that in many cases investing can be leveraged to achieve moral principles whilst providing a strong return for the individual investor.

Consider gender equality as an example. Broadly speaking, in 2019 company boards across the western world are still largely dominated by men. This is clearly an area where more progress needs to be made, at least in line with other spheres where women have climbed hierarchies to achieve top executive positions (e.g. media and entertainment). In fact, investment firms can be some of the worst performers here, with women comprising about 4% of the top jobs.

Yet there is strong evidence to show that gender diversity in the boardroom is strongly correlated with higher investment returns. This naturally puts internal pressure on such firms to bring more women into senior positions; after all, the more money investment firms can make for their clients, the more successful they’re likely to be! At the same time, clients of investment firms can apply moral pressure by demanding greater gender diversity from such companies.

Investing & Income Equality

This can be quite a complex and emotional topic, and on the surface it can seem like investing naturally creates large income disparities. After all, we’ve all seen the headlines about UK banker CEOs who earn as much as 120 times that of their average employee.

Of course, here we start to enter the classic debate: “Should such CEOs earn more than their employees due to their role and responsibilities, and if so, how much more is acceptable?” Most people we speak to seem to take a balanced view, which we would broadly agree with. People in higher positions who deliver more value should be paid more, but their employees should be paid a good living wage, and efforts should be made to close excessive, unnecessary income disparities between the “top and bottom” of the business (e.g. lavish, undeserved bonuses).

In this respect, investing can make a positive difference; moving companies towards income equality without achieving an unrealistic goal of complete income parity. Again, a big part of this change can come from clients of investment businesses, who can increasingly expect such companies to promote fair wages internally, to set an example regarding director bonuses, and bring employees more into the business as stakeholders (e.g. think of John Lewis’s “Employee Ownership” approach). Clients can also apply more pressure on these investment companies to prioritise investments into companies and funds which also take a similar approach to their internal structure, as well as to the businesses and individuals involved in their supply chains.

Final Thoughts

At this point you have likely noticed that this is a huge topic, and we’ve barely been able to scratch the surface here in this article! The good news is, individual investors can make a positive difference to address the numerous risks associated with inequality, and also benefit from the advantages of doing so.

If you are interested in finding out more about sustainable, ethical or environmental investing or would like to develop your portfolio, then we invite you to get in touch. At WMM, we can offer a free, no-obligation consultation to get to know each other, and bring some clarity to your financial situation and goals. You can reach us on 01869 331469

If you’re new to investing then you might be confused about how it exactly works. Perhaps you’re vaguely aware that it involves setting money aside regularly over a long period (e.g. 10+ years) into companies, funds and other assets which causes your net worth to grow. You’d be right, but how does investing lead to wealth growth?

Broadly speaking, there are two main approaches to investing, often referred to as ‘active’ and ‘passive’. In this short guide, we will be explaining the difference between the two, and outlining WMM’s reasons for primarily advocating the latter approach when it comes to constructing an investment portfolio for our clients.

We hope you find this guide helpful, and if you have any questions about your investments then we invite you to get in touch to arrange a free, no-commitment consultation with one of our financial advisers here at WMM.

Active & Passive: An Overview

When you put your money into a UK deposit account, it wasn’t too long ago when you used to be able to expect a reasonable return earned via interest; in some cases as high as 6%. Today in 2019, however, you’re lucky if you can find anything close to a 2% interest return. When you factor in the fact that inflation, at the time of writing, sits at around 1.7%, making any money at all on cash investments is difficult. Most people are losing money in real terms.

This situation has encouraged many people to consider investing, to increase their prospects of growing their wealth and retirement savings over the long term. However, most people do not have the confidence, experience, risk appetite or resources to invest “Dragon’s-Den-style” into individual companies. So what are your options?

For most people, the primary route available to you is to consider investing in “funds”. This essentially involves pooling your money together with other investors, which is then invested into multiple companies or assets. The investment returns are then distributed amongst the investors according to the amount committed as well as the performance of the investments.

For instance, suppose you invest some of your money in a FTSE 100 tracker fund (along with other investors). This fund follows the performance of the UK’s biggest 100 companies, and averages the shares of all of these companies to produce an index. If the index goes up, then your investment produces a higher return. If it goes down, then so does your investment.

This is the essence of “passive investing”, since it involves committing your money and “holding” it there to follow the index(es) you have chosen. It’s worth noting that a portfolio containing passive investments should really involve multiple tracker funds to spread out the investment risk (i.e. “diversification”), and the investor is in essence seeking to capture the ‘Market Return less costs’.

The passive approach to investing is quite different to the image many people have in their minds, when they think about investments. Quite often, the popular image is of a fund manager who spends every day investing in certain companies and pulling money out of others, to try to “beat the market” for clients. This is known as active investing.

Pros & Cons of the Approaches

Depending on your experiences, beliefs and background you might be more inclined towards active or passive investing. At WMM, we want to be fair in outlining the advantages and disadvantages of both approaches, but also put our cards on the table and state that, in general, passive investing tends to offer a higher likelihood of increasing a client’s net worth over the long term.

Here are some of the points in favour and against active investing:

Pros

• Active investing is often considered to be quite flexible, as you are not limited to a predetermined set of investments (as you tend to be when picking tracker funds).
• Active investing has shown some prominent cases of generating strong success stories for their clients. For instance, in 2013 Apple dropped to less than $60 per share. Many active fund managers anticipated the dip and invested clients’ money into Apple whilst it was low. By 2017, Apple has risen to $150 per share.

Cons

• Investment management fees tend to be higher with active fund managers. These fees can significantly eat into an investor’s returns over the long term.
• Even the best fund managers struggle to consistently beat the market over many years. In fact one study by the Pensions Institute showed that between 1998-2008, only 1% of active fund managers produced returns which overtook their costs.

Let’s now consider some of the pros and cons of passive investing:

Pros

• As mentioned, passive investing tends to carry lower expenses than active fund management, which tend to lead to more money in investors’ pockets. The lower cost is generally because a tracker fund does not need to employ an active fund manager to buy and sell stocks each day.
• Passive investing mainly follows index trackers, which represents the aggregate wisdom of millions of investors regarding the share value of the companies concerned. By and large, this means that the true value of most companies’ shares is already priced in. This makes financial markets in the developed world quite robust, meaning it is harder for active fund managers to get an edge. This allows the passive investor to potentially benefit from long-term growth without needing to constantly monitor their portfolio.

Cons

• Passive investing is, by nature, more of a “buy and hold” approach to investing, which can sometimes lead to missed opportunities which might be open to the active investor (think of the Apple example above, between 2013-2017).
• Sometimes passive investors can become complacent, adopting a “set and forget” approach to their portfolio. This is dangerous, as even a predominantly passive investment portfolio will need to be reviewed at least once a year to ensure everything is still on course towards its investor’s financial goals.

This article is for education, inspiration and information purposes only. It was intended to explain common Investment approaches in a very simple light. In fact, the term ‘passive’ is an often misused term covering certain investment funds which are to an extent actually ‘active’ but for specific reasons. Therefore this basic content should not be taken as investment or financial advice. To receive regulated, tailored financial advice regarding your situation, or to find out more about WMM’s investment philosophy then please contact one of our financial planners.

In previous posts here at WMM, we have discussed (in broad terms) what environmental investing is, how it has developed in recent years and how people can get started with social impact investing or “ESG investing” (Environment, Society & Governance).

As clients and readers of our blog have expressed more interest in this subject, we thought it would be helpful to go into a bit more detail. Here, we’ll be sharing five broad strategies when it comes to ESG investing, which you may want to consider with your financial adviser.

Please note that this content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive such advice, please consult an independent financial planner here at WMM (in Oxford) or closer to your location.

Five ESG Investment Strategies

#1 Non-ESG Exclusion

This approach can probably be described as the “purist” approach to ethical and environmental investing. Under this strategy, you work with your investment manager to “rule out” specific industries or sectors (e.g. oil extraction), countries or businesses (e.g. those producing high levels of CO2 emissions) from your investment portfolio, using ESG principles are your guide.

The advantage of this approach is that it allows many investors to align their ESG values firmly with their investment strategy. The potential drawback, however, is that this approach can limit your options when it comes to building a balanced portfolio which not only appropriately diversifies (in order to mitigate risk) but also holds the potential for strong returns.

#2 Leader Screening

Some investors might be comfortable committing their money towards companies in industries which the former strategy would exclude, on the basis that these businesses are showing a high ESG performance in relation to others in their sector. For instance, under this approach, an investor might be happy to invest in car manufacturers which are leading the marketing in electric car manufacturing, relative to others in the automobile industry.

The advantage of this strategy is that is can help incentivise companies in a wider range of industries to pursue ESG principles. The drawback, however, is that this approach might not fit as neatly with an investor’s ESG values compared to the first approach.

#3 Integration

Under this strategy, ESG investments are gradually incorporated into an investor’s portfolio alongside more traditional, non-ESG investments. The exact balance between the two types of investment might vary from person to person, depending on their distinct investment goals and their personal tolerance to investment risk.

This approach can be attractive to investors who wish to start exploring the world of ESG investing, without necessarily going “all in” (which might feel too risky or uncomfortable). It also gives the opportunity to learn more about ESG investing via direct experience, in an investor’ portfolio. On the other hand, this approach to ESG can feel too “watered down” to some people.

#4 Impact Investing

There are certain companies in the world which exist specifically to address certain issues pertaining to the environment or society. Examples include firms which offer storage for renewable energy sources, such as wind or solar power. Through an impact investing approach, an investor can focus their money on these types of companies to generate a positive return, whilst making a positive difference.

The attraction of this approach to ESG investing is that it is not simply about “damage limitation” regarding the environment. Rather than just investing in companies which are trying to reduce their carbon footprint, this strategy involves focusing investments on businesses which are actively trying to reverse the problem. This can feel tremendously exciting.

However, this type of investing needs to be navigated carefully with your investment adviser or financial adviser. This is particularly because many companies which qualify as impact investments are also innovative startups, which tends to carry higher investment risk.

#5 Ownership / Direct Engagement

Another way to influence different companies towards adopting an ESG approach is to directly engage with them. This doesn’t necessarily mean standing outside of their offices with a placard, by the way! Rather, it involves using tools such as shareholder power to bring ESG principles more onto the board’s agenda, and influence positive change.

If you are a company shareholder yourself, then you might consider doing this in consultation with a professional adviser. On a wider scale, however, you could adopt this approach by investing in funds and financial products which apply this influence to companies, on your behalf, at the executive and board levels. This approach can be attractive to many investors. Its drawbacks include limits to the range of products and funds which currently do this, although it would be fair to say that the direction of travel is towards growth in these opportunities.

Final Thoughts

As you can see, there is a range of approaches to ESG investing. Each strategy holds out its own respective pros and cons, and will likely vary in appeal depending on each investor’s distinct goals, circumstances, values and attitude to risk.

Many people might be interested to have learned the difference between “ESG investing” and “social impact investing”, after reading the above. The former can be described as an “umbrella” term, which refers to investment approaches which factor ESG principles into their portfolio to varying degrees. The latter goes further than this by actively investing in companies which seek to not only reduce their own negative impact on society and the environment but also make a positive difference via their products, services or solutions.

If you are interested in learning more about how you could integrate an ESG approach into your own investment portfolio, then we’d be delighted to hear from you. Get in touch today to arrange a free, no-commitment financial consultation with a member of our team:

01869 331469
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