Column: The responsible portfolio | The duty

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This week, a couple’s request caught my attention. “We are a couple whose personal values [lui] dictate to move to a fully responsible portfolio. We would like to know how much performance we have to sacrifice and how to go about doing it. We also ask ourselves many questions about the risks of greenwashing. “

There is no doubt that savers are interested in responsible investment (RI). For new investors, the decision to bet on RI will be easy. All you need to do is find out about the options available from a specialist and adopt an investment policy that meets your personal financial goals, your risk tolerance and your values.

In the vast majority of cases, the transition to a so-called “responsible” portfolio does, however, lead to questions and reflections. Many are wondering about the option of making a full transition, while others are considering the gradual integration of RI over new purchases. Here are some things you should consider before taking action.

See beyond performance

First, I performed a comparative analysis of the old couple’s portfolio and the 100% IR model portfolio used with us. The analysis shows that in the short term, the return of the RI portfolio is slightly higher; in 2020, the IR portfolio gave very attractive returns. Annualized over more than three years, the yield differs less. However, this comparison has its limits, since some funds in the RI portfolio were created very recently. It is furthermore impossible to know if the enticing results of 2020 are not attributable to a certain effect of novelty and infatuation.

The couple should also know that comparing two portfolios should not be limited to comparing past performance. Standard deviation is used to assess the risk of a portfolio, by measuring the change in the value of an asset in relation to its average return over a given period. A higher standard deviation implies a more volatile investment and a more uncertain return. In this case, the standard deviation is a few basis points higher for the IR version of the portfolio. The upward and downward capture ratios are also to be considered when hesitating between two funds or two portfolios.

The ideal is to choose funds that capture the largest possible increase in their benchmark stock market index, and the least possible funds that are declining. Overall, in the comparison made for our readers, the net capture was slightly more favorable to the IR portfolio. Finally, to help our couple make a decision, the information ratio was also compared. This measures the “active” return, ie the manager’s performance in stock selection, relative to a benchmark. This confrontation also slightly favored the IR portfolio.

The real impact of the IR portfolio

I understand the fear of investors regarding greenwashing. Their first weapon to guard against this is to understand the different strategies used by managers of so-called responsible funds, funds that integrate environmental, social and governance (ESG) factors. We must not think that all funds that do not use the exclusion strategy are only marketing. In addition, limiting your choice of funds does not allow you to build a well-diversified portfolio, which remains the highest quality of a long-term portfolio.

In opening up options to include funds using, for example, the thematic strategy or the integration of ESG factors into financial analysis, one should however be cautious and consider the real impact of the funds offered. For example, investors can check with their RI specialist how the method of selecting securities and actively managing the fund (s) reflects their commitment to ESG issues. It is also possible to quantify the share of a portfolio represented by investments in positive sectors, such as water management, renewable energies and health, and, conversely, to try to retain investments whose exposure in unfavorable sectors, such as intensive agriculture, armaments or petroleum, is lower. The analysis carried out for our readers was thus able to show that beyond performance, their current portfolio is much more present in negative sectors than the model IR portfolio.

No bad choice

In short, our couple should be reassured by this analysis. His current portfolio is very good, but my analysis shows that switching to a portfolio that fully reflects his values ​​as he wishes is not risky. So he has a choice! He can even expect comparable returns, with slightly more risk taking. Finally, he must call on an IR specialist to distinguish greenwashing from the fact that an IR portfolio can use different strategies with different outcomes. While it remains difficult to fully assess the impact of so-called responsible funds, it is also wrong to think that all these investment options are only green laundering.

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