In its reflection paper Metamorphosis. Rethinking investments together, which should be the central theme of its global seminars in 2022, the human resources firm Mercer Canada predicts in particular that the Alpha will win ahead of the Beta, which the strategic contribution of fund managers will relegate to the second rank the approach emphasizing correlation, with markets or between securities. An Alpha favoring the contribution of active management with a long-term perspective, or even exposure by themes with little or no correlation to the market borrowing from the universe of private placements, alternative funds or even exchange traded funds (ETFs ). Pushing, therefore, more towards impact investing.
This transition can already be seen with ETFs. According to National Bank data for 2021, while the index approach – and the attendant smallness of management fees – retained its dominance in the United States in terms of investment in this market last year, we witnessed a proliferation of products offered and investments in the family of actively managed vehicles. By category, Value and Small Cap funds dominated, followed by an “explosion” of thematic and sector ETFs. Those that offer protection against inflation, and ETFs that offer cryptocurrency futures contracts topped the “top-5” list.
In Canada
In Canada, if we exclude ESG funds (for environmental, social and governance issues), thematic funds have doubled their 2020 record. Examples of themes: travel and leisure, infrastructure, semiconductors, metaverse, lithium and technology linked to batteries …
For ESG funds, we are talking about an acceleration in interest and a doubling of the number of products offered under this label between 2020 and 2021, from 50 to 100. But all this is still marginal in a Canadian industry. having witnessed the birth of 202 ETFs last year, bringing the total to 1,177.
ETFs have also retained this popularity over traditional investment funds which allows them to post equal or greater liabilities since the 2008-2009 crisis. The year 2021 was an exception in Canada, however, with ETFs raising $ 53 billion, compared to net sales of $ 112 billion for traditional funds (at the end of November), the reversal being explained by the rise in savings of households under the wealth effect of the pandemic.
In the United States, the National Bank observes in its 2021 balance sheet that many managers have abandoned traditional funds for ETFs, obviously taking their advantage in terms of management fees, but also their greater transparency.
In the ESG segment, more specifically, Mercer Canada suggests that this shift towards more targeted investment strategies could testify to a vagueness that still persists around the normalization and the “green” classification of this asset which is still too often struggling. with greenwashing, pointing to this evoked potentiality of the existence of an “ESG bubble” in the market. Moreover, it would reflect the manager’s desire to be more explicit in his commitment or his position with regard to sustainable development issues.
Because there are still difficulties in establishing the compatibility of so-called ESG investments with a low-carbon commitment and uniformity in the classification of assets, while the disclosure of climate risk is done autonomously and voluntarily. However, the trend is towards homogeneous normalization and an index benchmark offering credible universal barometers.
ETFs
This shift to impact investing is facilitated by exchange traded funds, which have the advantage of offering portfolios the ability to position or adjust at low cost. Impact investing adopts a more targeted behavior, a more focused theme. It is based on the intention to achieve or create specific positive financial and social value and to measure its social or environmental effects, without sacrificing performance.
Formerly, in an ethical approach, the investor made his investment choices a question of discrimination and exclusion. He then retained a sieving approach. Rather, impact investing is part of a long-term, less punitive and more proactive approach. The investor applies a positive filtering to companies according to the ranking they occupy in their sector and their impact against a benchmark.
For small investors, the ETF universe also provides inexpensive exposure to asset classes that were previously only available to seasoned and institutional investors. These instruments provide access, sometimes sophisticated, to a basket of diversified securities which may include stocks, bonds, commodities or derivatives. Or even a targeted approach to investment and particular risk. Comprising a larger universe including index trust units (iShares), they combine diversification, liquidity and risk control at a lower cost.