From disruption to opportunity
As we progress through another year in which volatility and uncertainty are the norm rather than the exception, resilience and diversification are ever more desirable attributes. In such an environment, attention inevitably turns to investors’ core holdings.
In this survey we capture the responses and views from 200 UK wealth managers and advisers. The research sheds light on current macro sentiment, their outlook for global equity markets and how sustainability plays a role in client portfolios.
Investors are optimistic about returns despite macro worries
Key findings
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Confidence in global equities remains, despite headwinds
Though there is a good case to be made for UK equities
A home bias towards the UK is still prevalent
Inflation protection is a key source of its appeal
Global equity income is popular as a total return strategy
Nearly half expect to increase their allocations this year
Investors are still committed to sustainability, despite the criticism
It’s often seen as simply “the right thing to do”
Beliefs and values are driving ESG allocation decisions over returns
Though in practice the “S” in ESG is often intertwined with the “E”
Climate change and nature loss are the biggest concerns
Our survey looks at how investors are navigating a changing landscape
This is for investment professionals only and should not be relied upon by private investors.
6. Climate change and nature loss are the biggest concerns
5. Beliefs and values are driving ESG allocation decisions over returns
4. Investors are still committed to sustainability, despite the criticism
3. Global equity income is popular as a total return strategy
2. A home bias towards the UK is still prevalent
1. Confidence in global equities remains, despite headwinds
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Income investing
Minimum wealth threshold
Client type
Job role
87.5
%
Yes
12.5
No
Do you invest some of your funds into income-focused funds or strategies?
Client type?
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Respondent characteristics
Methodology – who did we survey?
We asked Investment Week and Professional Adviser subscribers for their views on global equities and sustainable investing through an online questionnaire, which was sent out in late March 2023 and received 200 responses. The sample of respondents was carefully weighted to include representation from 1) a range of different job roles and 2) advisers working with higher-net-worth clients (click below to learn more). We also conducted five in-depth interviews with a panel of advisers in late February, and their views have been summarised within the report narrative.
Wealth manager
23
Other
5
Financial planner
20
36
Independent financial adviser
Paraplanner
9.5
Fund selector
6.5
97.5
21.5
1.5
Ultra-high-net-worth individuals
High-net-worth individuals
Neither
Which of the following best describes your role?
Which of these clients do you work with?
<£50k
£50k-£100k
£100k-£250k
£250k-£500k
£500k-£750k
£750k-£1m
£1m+
29
16.5
2
4.5
What is your minimum wealth threshold to take on a client?
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Global Equity Income Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can also use financial derivatives for investment purposes, which may focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document (Key Information Document for Investment Trusts), current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0523/381588/SSO/NA
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The global economy may be facing plenty of headwinds at present, but respondents to our survey remain broadly positive about the ability of global equities to navigate the uncertainty.
Over three-quarters said they were either “very” or “somewhat” confident that global equities will provide an attractive return over the next 12 months.
Another emphasised the need for a broad outlook. “I’m a very long-term person and I would view there as being opportunity in certain areas of the market. Whether or not now is exactly the right time to get in, I'd rather do so early and let it run.” All this positivity comes despite significant worries about global macroeconomic conditions in the short to medium term. Two-thirds of respondents said they were either “very” or “somewhat” concerned about inflation risks, with 58% saying the same of market volatility and over half expressing concern about interest rate rises. When asked to elaborate on their macroeconomic views, respondents gave a vast range of opinions, perhaps reflecting the uncertainty of the moment. However, one prevailing belief was that while inflation will come down, it will be more sticky than we think. Another was that market volatility will continue while we still have geopolitical risks like the war in Ukraine and tensions with China.
“Whilst 12 months is too short a horizon to be confident of positive returns, I remain optimistic for growth in the medium term”
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Global economic conditions: selected respondent views
1/2
“I feel more confident that inflation will reduce over time, but I feel that interest rates may continue to rise in the interim and equity markets will continue to be volatile whilst rates are changing”
2/2
How confident are you in global equities to provide an attractive return over the next 12 months?
How do you currently feel about the outlook for global macroeconomic conditions?
Very confident
Somewhat confident
Not very confident
Not at all confident
66
10
3
“This year we can already see that markets are starting to gain a little bit more confidence back. So we’re trying to get that through to our clients, showing them some historical trends in how equities have recovered in the past.”
As one of the advisers we interviewed put it:
11.5
10.5
1
25
52
14.5
19
43
37
41.5
Inflation risks
Market volatility
Interest rate rises
Very concerned
Somewhat concerned
Unsure
Somewhat optimistic
Very optimistic
66.7
10.2
3.1
According to Aditya Shivram, portfolio manager for the Fidelity Sustainable Global Equity Income Fund, there is room to be cautiously positive near-term. “Inflation data and changing interest rate expectations continue to drive market moves,” he says. “Despite issues in the banking sector, central banks around the world raised interest rates, showing continued commitment to the fight against inflation.”
“Despite a turbulent start to the year with investors facing continued high levels of inflation and a banking crisis, global equities rose strongly over the first quarter.”
Furthermore, he adds:
Fidelity Survey: From disruption to opportunity
Home bias has been studied by academics since the early ‘90s. Although investor outlooks have become more global, investors still seem to have a skew towards investing in their own country, even when it would seem intuitive that a properly diversified approach should bring substantial benefits.
UK investors have been no exception, and according to our survey respondents, the trend persists today. When asked whether UK investors tend to allocate more to UK equities than they would consider optimal, nearly three-quarters agreed.
51
27
Stayed the same
Increased
22
Decreased
9
56
18.5
Strongly disagree
Strongly agree
“Because of home bias, UK investors tend to allocate more to UK equities than I would say is optimal“
Explaining their answers, many respondents put the phenomenon down to familiarity with UK companies and domestic politics. They argued that, for better or worse, investors believe this helps them to make better decisions and engenders confidence. A number of respondents also pointed to the reduction in currency risk that derives from investing domestically, and the fact that 50% of earnings in the FTSE 100 are from overseas anyway. Possibilities of bias need to be balanced against the fact that today, there is actually a good case to be made for UK equities. Despite concerns around Brexit, economic uncertainty and mixed messaging from policymakers, Fidelity believes the consequent derating has made UK equities undervalued compared to other developed markets, particularly the US. Furthermore, the strong performance of value stocks last year provided the UK with a tailwind due to its tendency towards a value bias. The start of 2023 has continued in this vein and could signal more opportunity to come.
As for the respondents to our survey, they were split in how they’ve adjusted their UK exposure in the past 12 months. On the one hand, 22% had reduced their exposure, but on the other, 27% had increased it.
In the bearish camp, respondents cited concerns about the UK’s prospects. However, the UK bulls pointed to attractive valuations compared to other developed markets, particularly among small and mid caps after being a relatively unloved market for a number of years.
How have you changed your allocation to UK equities over the past 12 months?
Of course, any allocation towards the UK needs to come as part of an appropriate portfolio weighting. A properly diversified, global allocation will reduce country-specific risk and provide access to a much broader set of opportunities, sectors and investment themes. The increasing focus on sustainability also supports this. As more UK investors formalise how they integrate ESG considerations into their allocations, a global approach is arguably best placed to provide unconstrained access to a broader set of attractive sustainable investment opportunities.
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Somewhat agree
Neither agree nor disagree
Somewhat disagree
"Because of home bias, UK investors tend to allocate more to UK equities than I would say is optimal"
Within the global equity toolkit, it is clear that income funds and strategies are playing an important role. Some 88% of our survey respondents said they invest into income-focused funds or strategies.
Does today's inflationary market make you more likely to upweight your allocation to a global equity income strategy?
This can be put down to income strategies’ defensive qualities, particularly at a time of elevated inflation. More than a third of respondents to our survey said today’s inflationary environment makes them more likely to upweight their allocation to global equity income. “Unlike bonds, which in most cases pay a fixed level of interest, dividends are paid from company earnings which have the ability to grow in line with inflation,” says Aditya Shivram, portfolio manager of the Fidelity Sustainable Global Equity Income Fund. “This is particularly the case with high quality businesses with high margins and pricing power, supported by strong competitive positions, that are able to raise their prices to offset the increase in their costs.” Many of our respondents appear to recognise this. While 23% said they use income strategies primarily for the natural income, more than two-thirds did so for their defensive qualities within a total return framework.
6.4
Less likely
35.5
More likely
58.1
Remain the same
Recent fund flows have only supported that case. According to the Investment Association, the IA Global Equity Income sector has seen positive net retail sales in each of the 12 months to February 2023, at a time when wider equity markets have seen outflows.
What influence do you feel the strength of a company's sustainability characteristics has on its long-term dividend growth potential?
Turning to the factors that influence the selection of a global equity income strategy, total return performance was the most important, followed closely by the fund manager’s track record and ongoing charges. By contrast, respondents placed relatively little weight on headline yield. “We believe this to be a prudent approach,” says Shivram. “Often stocks with the highest yields in the market do not produce the best long-term outcomes for investors.”
Neither of the above
Which of the following are you more likely to invest in: global equity income funds, or regional equity income funds?
48
Global equity income funds
32.6
Equal preference
Regional equity income funds
15.4
4
“Stocks with seemingly high dividend yields today are often more prone to cuts,” he explains. “Companies will often trade at a high dividend yield because the market questions its financial strength or cashflow resilience and the likelihood of dividend payments being sustained.” “Dividend investors must therefore put in the work by carrying out in-depth research on the fundamental strength of the company in conjunction with the solidity of its balance sheet.”
9.7
22.9
For total return
For natural income
67.4
Indeed, dividends are a key building block for total return, says Shivram.
He adds that even if an investor has a clear income requirement, it should not come at the expense of capital. “It should be combined with a focus on the quality of the business to ensure that the income stream is sustainable and can grow over time, supporting total returns.”
“Investing in high-quality businesses with resilient earnings streams can support lower drawdowns and deliver an attractive compounding of returns across a cycle.”
Do you invest in global equity income funds/strategies for income or for their defensive qualities within a total return approach?
Big positive impact
Moderate negative impact
0.6
Big negative impact
25.1
Makes no difference
60.6
Moderate positive impact
Fidelity is a big believer in sustainability as a marker of a company’s long-term growth potential, and our survey respondents largely agreed. Some 70% said it had a positive impact. “As consumers, regulators and investors intensify their focus on sustainability issues, managing environmental and societal risks will form a key part of the investor toolkit to avoid higher regulatory costs, litigation, brand erosion or stranded assets,” says Shivram.
How important are the following factors when selecting a global equity income strategy?
Respondents rated each factor on a scale of 1 to 5, where 1 = ”not at all important” and 5 = ”extremely important”. These figures represent the average score.
4.0
4.2
3.9
3.8
3.3
2.8
Total return performance
Fund manager track record
Ongoing charges
Headline yield
SFDR rating
Stability of income stream
Not applicable
Does today's inflationary market make you more likely to upweight your allocation to global equity income strategy?
Respondents rated each factor on a scale of 1-5, where 1= "not at all important" and 5= "extremely important". These figures represent the average score.
Sustainable investing had a tough year in 2022. Critics lined up to make accusations of greenwashing, while many funds faced performance challenges as fossil fuel prices soared and tech stocks struggled. Yet the long-term case for sustainable investing remains, and investors appear to recognise that. Some 44% of respondents to our survey
said they had increased their allocation to sustainable investing strategies over the past 12 months. This compares to just 5% who decreased their allocation. Not only that, but 46% believe their allocation to sustainable strategies will increase over the next 12 months. Just 0.5% believe it will fall.
”Elsewhere, electrification and automation offer structural sources of growth for tech hardware and capital goods businesses.” We can see further evidence of the growth of sustainable investing in the fact that the vast majority of respondents said they now incorporate it into their fund selection. Indeed, only 5% said they don’t consider it at all. And nearly half said they invest greater than 10% of their assets under management in ESG strategies.
Beliefs and values are a bigger sustainability motivator than returns
Over the past 12 months, how has your allocation to sustainable investing strategies changed?
51.5
Remained the same
43.5
Decrease
Increase
54
45.5
0.5
Over the next 12 months, how do you expect your allocations to sustainable investing strategies to change?
To what extent is sustainability being factored into your fund selection?
Approximately what percentage of your overall AUM is currently allocated to ESG strategies?
It is an integrated part of my fund analysis for all clients
I sometimes consider it where it’s appropriate
I do not consider it at all
59
“The investment case for sustainability has always been a long-term one,” explains Matthew Jennings, Director, Sustainable Investing at Fidelity. “Major changes in the global economy are creating new opportunities on a multi-year basis.” Aditya Shivram, portfolio manager of the Fidelity Sustainable Global Equity Income Fund, adds: “The large-scale shift towards a sustainable global economy will likely continue to offer long-term investment opportunities across a range of different sectors. For example, the rollout of renewables by utilities as part of the energy transition will support asset growth.
Jennings adds that if you look at lighter-touch ESG strategies, these are much more widespread than dedicated sustainable ones. “While specialist sustainability strategies remain a relatively small (but growing) part of UK investors’ allocations, general ESG integration into more ‘mainstream’ strategies is increasingly becoming the norm across the industry,” he says.
“In addition, as fund managers launch new strategies to cater to clients’ interest in sustainability, we can expect these allocations to increase.”
0%
1-10%
10-20%
20-30%
Over 30%
26
49.5
“The investment case for sustainability has always been a long-term one,” explains Matthew Jennings, director, sustainable investing at Fidelity. “Major changes in the global economy are creating new opportunities on a multi-year basis.” Aditya Shivram, portfolio manager of the Fidelity Sustainable Global Equity Income Fund, adds: “The large-scale shift towards a sustainable global economy will likely continue to offer long-term investment opportunities across a range of different sectors. For example, the rollout of renewables by utilities as part of the energy transition will support asset growth.
"Elsewhere, electrification and automation offer structural sources of growth for tech hardware and capital goods businesses.” We can see further evidence of the growth of sustainable investing in the fact that the vast majority of respondents said they now incorporate it into their fund selection. Indeed, only 5% said they don’t consider it at all. And nearly half said they invest greater than 10% of their assets under management in ESG strategies.
Matthew Jennings, Director, Sustainable Investing at Fidelity
What ratings do you use to screen for sustainable funds?
Morningstar
61
MSCI
28.5
S&P
13
Sustainalytics
Bloomberg
(Respondents could select more than one option)
Despite the growing conviction among asset managers that sustainable approaches are beneficial to returns, our survey found that the most influential factor for investors remains beliefs and values. Those that choose to invest on a sustainable or ESG basis often simply believe it is the right thing to do.
That said, it should also be noted that all the factors we asked about achieved an average score above the midpoint of 2.5. This suggests that, on average, respondents consider them all to be influential, including the long-term value of sustainability and the options for diversification.
Regulation also has a role to play in encouraging sustainable investing. Indeed, it was listed by respondents as the third most influential driver for investing on an ESG basis. For those in the UK, the upcoming Sustainable Disclosure Requirements (SDR) is now visible on the horizon – it has recently been out for consultation and the government is expected to publish a response in Q3. Respondents to our survey said they expect it to have an impact on how funds are selected for sustainable portfolios, though for most this impact will be moderate rather than big. In assessing the implications, Jennings points to the precedent in the EU, where the launch of SFDR coincided with a significant increase in demand for funds which explicitly integrate sustainability. “While the UK’s SDR regulation is different in many important ways,” he says, “we hope it will introduce more clarity into the market and give investors the confidence in choosing funds that are aligned with their needs.”
Do you think the UK’s Sustainable Disclosure Requirements (SDR) will have an impact on how funds are selected for inclusion in sustainable client portfolios?
Influence of the SDR?
Yes, a big impact
Don’t know
Yes, a moderate impact
26.5
8
2.6
2.9
3.0
3.2
3.7
ESG aligns with the beliefs and values of my clients
ESG aligns with the beliefs and values of my business
Regulatory requirements
I believe ESG creates better long-term value
ESG provides greater options for diversification
How influential are the following factors on your decision to invest on an ESG basis (or not)?
Respondents rated each factor on a scale of 1 to 5, where 1 = ”not influential at all” and 5 = ”extremely influential”. These figures represent the average score.
In terms of the particular beliefs and values that are motivating investors, climate change was given as the most important, reflecting the substantial public concern about this topic.
Nature loss came in second. This reflects the fact that biodiversity is a key focus for clients and has made clear strides up the policy agenda over the past year.
3.6
Climate change
How interested are your clients in the following sustainability themes?
Nature loss
Supply chain and modern slavery
Diversity and inclusion
Employee welfare
Respondents rated each factor on a scale of 1 to 5, where 1 = ”not at all interested” and 5 = ”extremely interested”. These figures represent the average score.
Elsewhere, it’s notable that social issues like diversity and inclusion and employee welfare ranked lower, suggesting that investors place less value on the “S” in ESG than the “E”. However, according to Matthew Jennings, Director, Sustainable Investing at Fidelity, the dividing line between these factors is less clear than people recognise. “Delineating between social and environmental impacts can often be a somewhat academic exercise, with environmental impacts having significant effects on society.”
“Social issues such as diversity and employee welfare are receiving increasing attention, and there is a building body of evidence to suggest that companies with more proactive approaches tend to deliver better corporate performance.”
Learn about the impact we are making on climate change and nature loss
Respondents rated each factor on a scale of 1-5, where 1= "not at all interested" and 5= "extremely interested". These figures represent the average score.
