We look again with a cynical eye at the gap between being right on the ESG front and meeting the fiduciary duties which shall remain to ensure positive returns to managed monies.
We already mentioned that the general claim of the fund management industry to green credentials was made easy in 2020 by the fact that quality /growth stocks which naturally tick the ESG boxes were turbocharged by easy money when fear dominated. This nice state of affairs has been breaking down now that ‘filthy’ cyclicals are in command.
As AlphaValue’s creed has always been that there cannot be any good business model without a top-notch governance in the first place, it is interesting to look at the performance of a narrow portfolio of 25 equal-weighted stocks selected solely on their governance scores (as designed by AlphaValue using its own data) and on the resilience of their business models. By construction, it is a very slow rotating portfolio with quarterly controls and the odd change for companies no longer meeting requirements.
The news is not good. The annual performance of this governance-driven list is quite telling about the fact that it does not always pay to buy into governance orthodoxy with a near 4% underperformance ytd. By contrast with essentially the same constituents, the 2020 outperformance was splendid (12%).
Good governance may not pay
We do pay attention to the above as we are deeply convinced that the best investment is in firms with clean governance designed to protect the interest of all shareholders, above all minority ones in secondary markets. That calls for truly independent boards which are few and far between (not more than a third of the AlphaValue coverage of 460 stocks meet the criteria).
Above-performance metrics are conclusive and can be relied upon as this is part of a fully transparent stock selection process and tracking that anyone can backtrack on the AlphaValue website. No transaction costs are applied but would be tiny.
The implication is that it is utterly difficult to run a portfolio dominated by orthodox governance. It also means that it is utterly difficult to run an ESG portfolio if, as we do, the conviction is that there cannot be proper environmental and social attitudes without a top-notch governance as a first condition.
So, as mentioned in an earlier piece, ESG proponents will test in 2021 the phenomenal gap between buying into the long-term and short-term performances. That will help fund managers see the cost of reporting under article 8 of SFDR.