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How to talk to sustainable investors about high oil and gas prices

Soaring fossil fuel prices are testing the resolve of sustainable investors. But sustainable portfolios will deliver better long-term outcomes, argues Pendal’s MICHAEL BLAYNEY

  • Oil prices test resolve of sustainable investors
  • Expect better long-run outcomes from sustainable portfolios
  • Portfolio construction can smooth the ride

INVESTORS are understandably asking whether there’s a long-term cost to being in a sustainable fund when oil is trading above $US100 a barrel.

“The reality is that sustainable portfolios have had a more difficult time of it recently and people are asking whether investing in a sustainable fund might mean a long-term drag on returns because they can’t get exposure to certain sectors such as fossil fuels,” says Pendal’s Head of Multi-Asset Michael Blayney.

“The short answer is we don’t expect to get worse returns from sustainability over the long term.

“Indeed, we expect to get better long-run outcomes from sustainable portfolios.

“But you will see greater variation relative to a benchmark in certain types of environments.

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“If you want a sustainable strategy — and you screen out fossil fuels and weapons and tobacco and gambling and so on — then you have to accept that sometimes you will outperform and sometimes you will underperform.

“We saw a sustainable strategy work really well during Covid. During that period oil prices collapsed.

“Also, many sustainable portfolios have a slight growth tilt to them. And 2020 was a really great environment for growth investors and much of 2021 was pretty good too.

“But if you look at one-year returns of sustainable funds as a category now, they’re not looking as great. And year-to-date has been very difficult.”

Portfolio construction critical

In this environment portfolio construction takes on even greater importance.

“If you look at other asset classes for economic exposures that you’re lacking in equities, that gives you an extra tool to manage through these periods,” Blayney says.

“While we encourage people to focus on the long term, the reality is people do think about the short term and they do think about peer comparisons.”

Investing across asset classes can smooth the road for sustainable investors.

“If your sustainability strategy gives you a slight growth bias then you might want to look for investments that fit your sustainability strategy but also gives you a value bias, for example in your alternatives.

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“Or you might actively seek out a bit of energy price exposure and inflation hedging via commodity futures or certain types of renewable energy infrastructure.”

Beyond Aussie equities

Looking beyond the local equity market is also attractive.

Oil and gas companies have outperformed this year as oil prices have pushed beyond $US100 a barrel.

But oil and gas companies are less than 4 per cent of the MSCI World Index. So in global equities at least, there are plenty of opportunities for investors outside that sector.

“There is no reason to believe the oil and gas sector is going to outperform in the very long term. If anything, because of the decarbonisation economy it has big structural headwinds,” Blayney says.

All investors — including sustainable investors — need to have realistic expectation from the beginning.

“They need to understand that some equities in their portfolio might trail the market over the short term. But that is okay if they have the right strategy, structurally, for the long term,” Blayney says.

“To help them through some of those periods, they should think about sustainable balanced funds which hold some renewables, for example.

“To the extent that they can, investors should look at what they’re missing from equities and then use other asset classes to identify exposures which are consistent with what they are trying to achieve from a sustainability perspective.”

About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at April 27, 2022. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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