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Harry And Meghan Buy Into Fledging Ethical Investment Industry – Forbes

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News that Prince Harry and Meghan, the Duchess of Sussex, have a new role as “impact officers” at ethical fintech firm Ethic comes at an awkward time. Just a day after the announcement, data revealed U.S. investors are the world’s least interested in ethical investing.

Just 64% of U.S. investors used ESG (environmental, social and governance) factors when making an investment decision last year, according to a survey conducted by Royal Bank of Canada Global Asset Management (RBC GAM).

By comparison, over three quarters of Asian investors and 94% of Europeans considered such ethical issues when investing their money. And while their rates are rising, the percentage of investors considering ESG in the U.S. has fallen consistently over the last three years.

Donald Trump has a lot to answer for, says Melanie Adams, head of Corporate Governance at RBC GAM. The Trump administration barred retirement and pension plans from considering ESG factors when selecting investments, a decision that is only now being contested. “There was a big pullback during the Trump administration,” says Adams.

But, regardless of Trump, data shows a quarter of U.S. investors expect ESG portfolios to underperform their non-ESG counterparts. Ethical investments, they believe, would make less money. Anyone investing for maximum profit would therefore have to put their money into non-ESG stocks like oil and gas.

None of this bodes well for Harry and Meghan, who not only invested in Ethic earlier this year but also have their own managed portfolio with the New York-based startup, where, according to its marketing materials, “all investing is sustainable investing.”

The size of Harry and Meghan’s portfolio at Ethic is unknown, but the average account there is believed to be around $2 million, and the average investment during its series B funding round in March was $4.1 million. The firm manages a total of $1.3 billion between fewer than 1,000 clients. (Ethic did not respond to requests to verify these figures.)

Ethic invests according to each client’s preferences. Among the 19 issues that new investors pick from when signing up are things like “animal welfare,” “climate change,” “LGBTQ justice,” and “corporate diversity and inclusion.”

An Ethic spokesperson said preferences like these define each client’s portfolio. “We allow our clients to choose the environmental, social and governance issues that are most important to them and then help them create custom portfolios based on their preferences–not ours,” a spokesperson told the Telegraph.

Many of these issues chime with Harry and Meghan’s goals. In a joint opinion piece for The Washington Post, the Duke and activist Reinhold Mangundu argued against plans to drill for oil and gas in the Okavango River Basin. “We believe this would pillage the ecosystem for potential profit,” they wrote.

However, these issues are out of sync with the wider investment community. Most ESG-tied investments are made towards anti-corruption, cyber-security and climate change, in that order, with the latter dropping one place since the same RBC GAM survey was conducted a year ago.

The U.S. had the largest number of respondents saying that climate change was “immaterial” to their decisions. LGBTQ justice did not rank.

What Will Harry and Meghan Do As Impact Officers?

Ethic did not say what exactly Harry and Meghan will do as impact officers. However, in a press release, the company said “they want to shine a light on how we can all impact the causes that affect our communities.”

This implies some sort of ambassadorial role, which might promote the idea of ESG investing among an increasingly skeptical audience in the U.S. Their campaigning might be able to convince more investors to think about ESG factors when buying into companies and funds, or at least bump climate change up the agenda.

It is not only the investment community that needs to be convinced, but everybody with money to invest. In an interview with the New York Times

NYT
 announcing the move to join Ethic, Harry said he wanted to get the “younger generation voting with their dollars and their pounds.”

However, things might be already starting to change regardless of Harry and Meghan’s new job. “I think we are starting to see more and more recognition in the public,” says Adams. “We sent the survey out last spring, so it would be interesting to watch over the next few years how the survey plays out.”

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Oil Investments Must Rise to Offset Energy Prices, Soaring Inflation – Bloomberg

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The Riyadh-based International Energy Forum has called on companies to raise investment in oil and natural-gas production to $523 billion a year by the end of this decade to prevent a surge in energy prices and economic unrest.

The think tank’s comments echo those of Saudi Aramco, whose chief executive officer on Monday said there could be “chaos” unless governments stopped discouraging investment in fossil fuels.

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Personal Finance: Investing in Fund Managers in 2021 Was a Bad Investment Idea – Bloomberg

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As Leo Tolstoy taught us at the beginning of Anna Karenina, “Happy families are all alike; each unhappy family is unhappy in its own way.” It’s a lesson being relearned by investors in European asset managers, whose shareholdings have woefully missed out on the gains enjoyed across the broader equity market this year.

The environment for the fund-management industry continues to be challenging, to say the least, with downward pressure on fees, investor preference for cheap index-tracking products and an expensive arms race to keep up with the latest technology. But the biggest laggards among Europe’s standalone money managers have underperformed for idiosyncratic reasons.

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When Is A Good Time To Exit Your Mutual Fund Investment? – Forbes

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When it comes to mutual funds, diligent investors can find plenty of information in the public domain that can help them make their investment decisions. There is information on how to invest, when to invest, which funds to choose, how to choose funds, the risk involved in mutual funds and much more. However, there’s not much to be found on exit strategies for mutual funds, typically making this the biggest challenge for investors. Having conviction around an exit strategy becomes especially relevant whenever markets are correct; without it, investors panic and exit based on sentiment rather than a well-planned strategy. 

Many times investors try to time the markets by exiting their investments with a hope to re-invest at lower levels. This is a classic case of “market timing”. Also, at times, investors tend to treat mutual funds like stocks. A stock can be underpriced or overpriced and hence, there could be a case to exit an expensive stock vis a vis a mutual fund. A mutual fund, on the other hand, is a basket of investment products and the price of each unit reflects the value of the products in the basket. Hence, the question of over-valuation or under-valuation does not arise.

Knowing how to exit from a mutual fund is as important as knowing when to exit and can make or break your wealth building process. Exiting from a fund should not be done based on market swings, except in case of emergencies. One must do it thoughtfully, with a plan of action. 

Here are a few instances when an investor should consider exiting from the scheme. 

1. Achieved or Nearing Financial Goals? Exit from the Scheme and Invest in Less Risky Assets

When you are nearing your financial goal sooner than expected, your focus should be on preserving the corpus. When you are nearing your goal, your ability to take risks reduces. Remaining invested in an equity fund once the goal is reached could be counterproductive at times. 

If you have achieved your financial goal earlier than planned, you can exit from the scheme and shift your corpus to a liquid fund or even a bank fixed deposit to preserve the accumulated amount.

Either way, to protect the corpus you have amassed, when you are one or two years away from your goal, switch to less risky funds where the equity component is negligible. 

2. Want a Regular Income from your Mutual Fund Investment and Seek to Preserve your Capital? Do Systematic Withdrawal Plan (SWP)

If you want a regular cash flow from a mutual fund scheme, do not switch the same to a dividend option. It will be more efficient if you follow a SWP. This is an excellent facility, offered by mutual funds and it is also extremely tax efficient. 

When you choose a SWP plan, it allows you to redeem your investments in a phased manner. You can direct your mutual fund investments to your savings account. In a SWP, the value of a mutual fund reduces by the number of units you withdraw. 

Let’s look at the example given below to understand better. If you have your desired corpus of INR 1,000,000 in a fund, assuming that you redeem only 7% per month (INR 5,383) for a year, the amount will be taxed as per short term capital gains at 15% for withdrawals upto one year and long-term at 10% for above 1 year. Also every year the value of the fund would reduce due to withdrawal and increase/decrease due to market movements.

The total withdrawal as per this illustration is approximately INR 70,000 and if you had invested this in a dividend option, the tax liability would have been approximately INR 21,000 (assuming a 30% slab) whereas in the growth option your capital gains tax is INR 2,500.

3. A Shift in Fundamentals? Review and Rebalance

When a fund undergoes a fundamental change, the risk profile also shifts. This could be on account of a change in the fund manager, a change in the fundamental attributes of the fund or a change due to regulatory norms.

If the fund manager changes, his unique management style could affect the fund’s performance. Some of his decisions might deliver good returns while others may not, even though his decisions are well within the mandate.

Do track the fund performance over six to 12 months after the fund manager changes. If it underperforms drastically then you need to review the entire portfolio and you may need to re-align your investments in that fund. 

Some fundamental attributes of a scheme are its structure, investment pattern, etc. An example of a change in fundamental attributes could be if a banking fund changes its mandate to also include non-banking financial company (NBFCs) in its portfolio. If the changes are not in line with your investment objective, you may consider an exit option.

Regulatory changes include instances like SEBI introducing a 25% cap on large cap, mid cap and small cap each for multicap fund portfolio holding. This had caused quite an uproar and SEBI had to introduce a category called flexicap. 

Most fund houses did change their names as they did not want to rearrange their portfolios. Some funds like ICICI Pru Multicap Fund, Invesco India Multicap Fund, and Nippon India Multicap Fund realigned their portfolio as per the capping norms. 

If such changes occur and you are not comfortable with their impact on the scheme, as it does not align with your objectives, then you can exit from the scheme and rebalance your investment portfolio.

4. Consistent Underperformance of a Scheme? Switch to a New Fund

It is observed that not all schemes perform consistently and that past performance of the scheme shouldn’t be the only criteria used to invest in a scheme. But while redeeming it is vital to note the consistent underperformance of a scheme for a prolonged period.

Check for returns across various time periods and compare rolling returns of a fund that is performing poorly compared to its peers and the benchmark returns to see how inconsistent the fund’s performance has been. At times like this, an investment advisor plays a pivotal role, specifically for an investor who is not aware of the nuances of finance. 

Do research and try to understand the reason for its underperformance. Explore whether the entire scheme category has fared poorly or if the scheme is holding beaten down stocks in its portfolio, or if a fund manager has changed or if a particular sector is hit by any regulatory changes and the fund manager took undue risk. In short, find out why the scheme has performed poorly and gauge whether it is a one off case or the adverse factors will persist. This will help you in taking a call on whether you should exit or not.

If an equity scheme is underperforming continuously for three years or more as compared to its peers, you could consider exiting the scheme and transferring your investment to a similar fund that has a proven track record. But before investing in a similar fund, do a quantitative and qualitative research of the scheme. 

5. Change in Asset Allocation? Rebalance Portfolio

A change in asset allocation of your portfolio sometimes occurs due to market movements. At other times, a change in your personal situation, such as a change in age profile, necessitates a change in your asset allocation. In such cases, you could consider rebalancing your portfolio. Asset rebalancing will help you even out investment returns and could even force you to “sell high” and “buy low”.

For example, if your asset allocation is 65% equities and 35% debt. If equity markets go up and the equity allocation goes up to 70%, you may need to consider reducing your equity allocation by redeeming investments. It is important to maintain your asset allocation because it keeps your tolerance for risk at the most comfortable level. 

6. Demerger and/or Merging of Asset Management Company (AMC)? Review and Rebalance

Let’s consider the rare event that the AMC whose schemes you have invested in is sold to another fund house and the scheme gets merged with a similar scheme of the latter. Then evaluate the scheme’s performance, objective and holdings to see if they have changed or not. 

AMCs are sold for different reasons; however, it is unlikely that the objective of the merged scheme would differ from the one you initially invested in. If the performance of the merged scheme continues to be satisfactory, stay invested but if it is unsatisfactory, replace it with a similar new scheme from a different AMC.

7. There is an Emergency? Exit from the Scheme or Pause your Systematic Investment Plan (SIP) 

In case of any emergency, when your emergency fund is insufficient to deal with the situation, you can consider exiting from a scheme. If you are not able to continue to pay your SIP instalments you can also pause the monthly SIP for a while.

Most AMCs do offer an option to pause SIPs, if you find it difficult to continue because of any unforeseen emergency. Stopping your scheme investment will stop you from growing a bigger corpus and it could become difficult to start an SIP again.

The other option is to withdraw the previous SIP amounts and re-invest to continue with your investments but do not stop your SIP investment. If withdrawal is imminent, ensure you withdraw funds which are non-performing first and then the performing funds; even in performing funds first look at redemption from long-term and then short-term.

Bottom Line

Patience is the most important attribute needed in investments and specially when there are sharp dips. It is however, important to check your emotions and not get carried away by the buzz in the markets. Stay on your path of asset allocation and avoid market timing. 

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