ETF providers are missing a trick

Power station chimneys © iStock
Many of us would rather not invest in this

The big names behind the exchange-traded fund (ETF) revolution are sometimes accused of jumping on any new trend, making them slaves to fashion. But I’m not sure this is true. I can think of at least two examples – the absence of fossil-fuel-free tracker funds and the rise of market-neutral ETFs – to show that fund managers sometimes ignore really good ideas, opting instead for technical, “wonky” solutions.

A few years ago, a strident “divestiture” movement sprung up in universities, demanding that pension funds start to sell their equity holdings in big oil, gas and coal. I am a fairly pro-green investor, but at first this seemed too radical. We need a transition phase as we move to more renewable energy sources. Many see natural gas as a necessary part of that transition. So why stop investing in businesses that help move away from the real evil – coal – and then perhaps later from oil? However, flash forward a few years and the fossil-fuel-free movement is now making itself heard in the mainstream.

Despite this, there are no fossil-fuel-free ETFs in Europe (State Street has one in the US, which is a fossil-fuel-free version of the S&P). We don’t even have a coal-free ETF – surely the most obvious pro-green new ETF imaginable. What we have are lots of clean-energy funds or low-carbon indices, with accompanying ETFs, but these are very different propositions – you are making a positive commitment to invest in a sector, rather than actively avoiding fossil-fuel businesses. If you are looking for a fossil-fuel-free ETF, you could choose a sector fund such as healthcare, where oil and gas businesses aren’t relevant; or invest in mid-and small-cap trackers where the weighting towards energy is low (unlike the FTSE 100, where direct energy exposure is 12.6% of the value of the index). Yet these are indirect ways of addressing the issue. My message to the ETF issuers? This is an idea whose time has come – bring out some fossil-fuel-free or coal-free ETFs!

Profit whether markets rise or fall

Instead, what ETF issuers are thinking hardest about are solutions to eternal challenges for investors – such as how to invest in equities without the volatility you expect from momentum-driven markets. Last month, French group Amundi came up with a novel idea that I think we’ll see more of – a way to invest in equities with the aim of making money whether markets rise or fall. These “market-neutral” strategies have been used by hedge funds for many years. The idea is sensible, but can be fiendishly difficult to achieve. You invest in stuff you like (go long), and sell stuff you hate (shorting it). As a result, it shouldn’t really matter what the wider market does as long as you have the relative directions correct – if your “longs” rise by more, or fall by less, than your “shorts”, you make money. Amundi’s fund does this by tracking various smart-beta strategies – six different “factors”, such as value or momentum investing.

In a raging bull market, a market-neutral fund won’t make big gains. But during a crash, it should also avoid huge losses. It’s basically an absolute-return fund, but much cheaper (0.55% per year) than a hedge fund or active absolute-return funds, such as Standard Life’s Global Absolute Return Strategies. Expect more to launch soon. As to whether these complicated trackers will ever deliver on their promise – we’ll just have to watch the space carefully.


Activist watch

Procter & Gamble (P&G) has added activist investor Nelson Peltz to its board, after a boardroom battle that has dragged on for almost a year, says Hannah Boland in The Daily Telegraph. Peltz, chief executive of Trian Fund Management, will join the expanded board from 1 March next year. The US consumer-goods giant had initially lobbied against Peltz’s appointment, claiming he had previously destroyed long-term value in companies, and Peltz narrowly missed securing a seat at a vote at P&G’s annual general meeting in October. However, in a letter to shareholders confirming the appointment, P&G conceded that the vote had been “extremely close” and that it respects Peltz as “a highly engaged shareowner and investor”.

Short positions… a fund that returned 25,004%

• There are hedge funds with blockbuster returns, and then there’s the Pantera Bitcoin Fund, which has returned 25,004% since it was set up in 2013, says The New York Times. For comparison, the top-performing hedge fund in the world last year returned 147%. Many investors have not enjoyed the full return, having sold out during bitcoin’s decline in 2014 and 2015, but Pantera claims it has made a total $2.1bn for its investors in dollar terms.

• Chris Sier, the academic appointed to oversee an analysis of fees paid by pension funds, has apologised for accusing the asset-management industry of being “arrogant and complacent”, saying he is not biased against it, reports the Financial Times. The Financial Conduct Authority is “understood to have told Sier that his position is safe”, in spite of pressure from the Investment Association, the fund managers’ trade body, for him to resign.

• Investment firm Old Mutual is selling part of its UK asset-management arm – which looks after £26bn – to US private-equity group TA Associates, reports Reuters. Veteran fund manager Richard Buxton will continue to run the business. The £600m deal comes ahead of the listing of Old Mutual Wealth next year. The group has said it is breaking itself up because regulatory changes make the company “too complex to run in its current form”.