Fossil fuels are far from synonymous with ESG investing, but Russia’s invasion of Ukraine has upended the market. While many countries have made vows to cut global emissions and be net zero by 2050, that is getting put on pause as they are considering energy security first. Many euro funds have underweighted fossil fuels historically, but as of late almost 6% of ESG funds now own Shell which was previously zero at the end of 2021. The underperformance of funds is certainly a part of this and many are leaning on commodities surge in order to help recover. Moreover, the euro area has passed a regulation that includes gas and nuclear power as part of ESG. While some believe this is a good step because it encourages cleaner ffs such as natural gas others are worried it’s a slippery slope.
Finsum: This is a radical step in ESG regulation, and appears to be on pause as inflation has all countries concerned.
According to a study from Morningstar Indexes, pension funds and other asset owners in North America and Europe are adopting sustainable investment practices for their portfolios. Based on the “Voice of the Asset Owner” survey, which was based on 14 interviews with asset owners, pension funds saw ESG investments as a core element of investing. The asset owners stated that the inclusion of ESG investments was being driven by both their conviction in sustainable investing and client demand. The fund managers believe that ESG enhances their investment processes and does not subtract from investment returns. While implementing ESG can challenging due to shifting definitions and standards, their clients view climate as a big concern and are urging them to address global warming. While ESG has become a hot political topic in the U.S., pension funds are full steam ahead with ESG in their portfolios.
Finsum: Due to client demand and a conviction in sustainable investing, more and more pension funds are incorporating ESG strategies as a core element in their portfolios.
Over the past four weeks, U.S. bond funds were seeing net outflows as the bond prices dropped. However, investors were net buyers of U.S. fixed funds in the week that ended on Wednesday with U.S. bond funds attracting a net $2.72 billion in purchases. This marked the first weekly inflow for U.S. fixed-income funds since June 1 according to Refinitiv Lipper data. Investors purchased $5.68 billion in U.S. government and treasury fixed-income funds, the biggest weekly inflow since October of 2018. Investors also purchased $1.59 billion in high-yield bond funds. The reverse in net flows can be attributed to increasing concerns over the economy. While fixed-income securities have seen their share of losses this year, U.S. debt is still considered a safe haven asset.
Finsum: After four weeks of outflows, US. fixed-income funds attracted $2.72 billion in net purchases due to economic concerns.
Mortgage-backed real estate investment firm Aspen Funds recently announced that it will be offering alternative investment options for retail investors. Due to rising rates and recessionary concerns, most asset classes have seen steep drops this year. These losses have increased the demand for alternative investment options for investors. Previously, alternative investments were only available to accredited investors such as ultra-high net worth individuals and institutions, but more and more options are being offered to retail investors. While Aspen Funds hasn’t unveiled what type of alternative investment products it will be offering, the company focuses on assets such as mortgage notes, multi-family apartments, self-storage, and industrial real estate. The firm was started after the financial crash in 2008 and 2009 due to the demand for alternative options, so it would make sense in the current market environment to expand its offerings.
Finsum: Due to the current volatility in the market, there is a greater need than ever for alternative investment options for retail investors and Aspen Funds is looking to fill the void with a suite of upcoming alternative products.
On Tuesday, the ICE Bank of America MOVE index, which measures 30-day implied Treasury volatility, rose to its highest level since the market crashed at the beginning of the pandemic in March 2020. The reason for the high bond volatility is the dueling concerns of the Federal Reserve raising rates and the resulting fear that this will lead us into a recession. The Fed has committed to aggressively raising rates to contain rampant inflation. This has pushed yields higher amid a massive bond sell-off. The concern over a recession stem from the early 1980s when Fed Chairman Paul Volcker aggressively tightened monetary policy to get control of rising consumer prices. Bond volatility is likely to remain until we have a better idea of how the economy responds to the rate increases.
Finsum: With the Fed aggressively raising interest rates, concerns over a recession have led to massive volatility in the treasury markets.
While the stock market is starting to show signs of turning around volatility is still present. Adding to the complexities is the conflicting macro news that investors are getting. The most recent jobs report was strong despite signs growth is slowing, and the Fed is slamming on the breaks. For short-term investors and that nearer retirement, it might still be a bit before you jump back in. However, many on the street are telling young and long-term investors to get back in the market. Sectors like tech are turning around and acquisitions will be very fruitful for the long-run growth of the industry. Hedge funds are still running high on cash and in ultra-low exposures post-GFC, which could be a sign the end isn’t quite here yet.
Finsum: The next GDP release will be critical for the economy, if things are moderate and inflation isn’t extreme equities could rally.