Wealth advisers risk failing investors on suitability by not using technology appropriately to measure ESG preferences and being caught up in the ‘green rush’, behavioural finance experts Oxford Risk warns.
It argues that tech should be used as a microscope to determine investors’ ESG preferences but too often is acting as a blindfold with the risk that investors are not being matched to the right investments for them.
Oxford Risk is urging wealth advisers to make better use of technology to provide improved services to clients based around understanding their needs through detailed profiling.
Key problems it highlights include poor ESG labelling on funds which are becoming as “meaningless as the word natural on a food label” and failing to record investors’ individual preferences which are often complex and contradictory.
It warns that a focus on what can be measured risks products being developed not to help investors meet their social goals, but to game the measurement system.
Oxford Risk’s research shows most investors want the emotional comfort that ESG investments do what they claim to do and seek independent parties they can trust to verify those claims. The onus is on wealth advisers to match suitable ESG solutions to individual preferences. However, properly constructed ESG profiling provides a double bonus for wealth managers by increasing the amount investors put in ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.
Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk said: “As the ESG industry expands, so does recognition of its darker elements. There are signs of trouble ahead.
“And it’s likely to be unsuspecting and unsatisfied investors left picking up the tab. Investor demand for investments with some sort of socially conscious edge is obviously rising. But it is in asking: ‘what is it, exactly, that they want?’ that we start to see difficulties.”
Oxford Risk believes advisers need to determine how much ESG the investor should have, and then how much the investor is prepared to balance greater impact against financial returns.
Advisers then need to select investments based on investor preferences including considering their relative focus on E vs. S vs. G.
Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioural information and demographics, build a comprehensive profile. Oxford Risk’s financial personality tests can measure up to 18 distinct dimensions, of which six reflect preferences for ESG investing.
It believes the best investment solution for each investor needs to be anchored on stable and accurate measures of risk tolerance. Behavioural profiling then provides an opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for the anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.
Yield-starved Investors Should be Exploring Less Traditional Opportunities
Now is the time for investors to consider diversifying into less traditional asset classes, affirms the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organisations.
The assessment from deVere Group’s Nigel Green comes as global stocks continue to experience turbulence.
He says: “The three major equity indexes on Wall Street are experiencing their worst stretch of losses in decades, and this is being echoed globally.
“It comes amid investors’ concerns over inflation, which is forcing central banks to slam the breaks on their economies, the ongoing war in Ukraine, Covid lockdowns in China’s manufacturing heartlands known as the ‘factory of the world’, and some household name companies posting weak results.
“This backdrop is creating a yield-starved environment for investors.”
He continues: “As such, for those looking for both capital appreciation and capital preservation, now is the time to consider diversifying into less traditional, return-enhancing asset classes.
“These could include venture capital, structured products, cryptocurrencies, high dividend stock, hedge funds, managed futures, and direct real estate, amongst others.”
“Such investments could also be useful tools to improve the risk-return characteristics of your investment portfolio. This is because they increase diversification and reduce volatility, due to their low correlations to more traditional investments such as stocks and bonds; and they can hedge some portfolio exposures.”
However, says the deVere CEO, considering that these investments are often more complex than their traditional counterparts, working alongside a good fund manager will likely be critical to ensuring return-boosting results.
He goes on to say that whilst less conventional asset classes should also be considered, investors should remain invested in the traditional markets too “because financial history teaches us that stock markets go up over time.”
Nigel Green concludes: “Yield-starved investors should explore less traditional opportunities, not only for potentially higher returns, but also as they provide diversification and downside protection for their portfolios.”
Private Sector to Invest N169.72bn Tax Credit in Four Roads Construction
The Federal Government of Nigeria, through its Executive Council, on Wednesday, approved N169.7bn private sector investments for at least four road infrastructures under the government’s Tax Credit Scheme.
Minister of Works and Housing, Babatunde Fashola, made this known to the State House correspondents after the council meeting. At the meeting presided over by President Muhammadu Buhari, Fashola disclosed that the scheme was initiated in 2019 through Executive Order 7 signed by the President, and that the arrangement allowed private sector players to finance public infrastructure instead of paying taxes and then offset it over time using tax credits.
In the statement made available to Investors King, the four roads include a 234 kilometre stretch from Bali to Sheti through Gashaka to Gembu in Taraba State at the sum of N95,232,474,010.72 and the second road, which is also a tax credit scheme, is made up of three roads worth N74,486,577,050.
For the 234-kilometre road in Taraba costing N95.23bn, Fashola noted that N20bn under the NNPC Tax Credit Scheme would be disbursed to begin the project soonest.
“The two main memoranda relate to the uptake by the private sector in response to the tax credit programme, which we initiated in 2019, by Mr. President signing of Executive Order 7 to allow private sector finance public infrastructure in lieu of tax and then to offset it over time using tax credits.
“So the first road that was awarded today on that policy initiative is the rule road from Bali to Sheti through Gashaka to Gembu in Taraba State. A total of 234 kilometres reconstruction of that road in the sum of N95,232,474,010.62.
“The existing road, for those who are familiar with it, has no concrete stone base. It is just laterite on the asphalt so it doesn’t last and it’s breaking up and leading to potholes.
“So we’ve rewarded this now for reconstruction under the tax credit scheme, there’s a N20bn provision under the NNPC tax credit scheme that will be used to kickstart this immediately,” he said.
Fashola added that “the second road which is also the tax credit scheme, which was approved by the Council is actually three roads. The applicant, in this case, is Mainstream Energy Solutions, a major energy player in the country and is now seeking to also participate in this policy by investing a total of N74,486,577, 050.”
72% of North American Quant Fund Managers Struggle to Access High Quality Data
New research with fund managers in North America who collectively manage around $600 billion, reveals they are placing a growing emphasis on both the quality of the data used in their investment processes and on having access to the technological capabilities to efficiently process data (please see the attached press release). Six out of ten (60%) believe this is crucial to achieving above-average returns in the future.
The study, which was commissioned by quant technologies provider SigTech, found that 94% of fund managers find the process of evaluating data, ensuring it meets quality standards and negotiating with data vendors challenging. 72% say it is difficult to source data that is cleaned, validated and ready to use from vendors.
When it comes to onboarding new data sets, nearly six out of ten North American fund managers say they encounter problems, with 56% saying it takes between 1 and 6 months to have new data fully operational internally.
As a result of the many challenges North American fund managers encounter when sourcing and managing data, 64% expect to increase their budget in this area over the next few years.
When asked to pick the two asset classes where they encounter the greatest difficulty in accessing high quality data, 62% of North American fund managers cited fixed income, followed by 54% who selected commodities. In terms of the two financial instruments where they have the greatest difficulty in securing high quality data, 66% cited forwards, followed by cash/spot (58%) and then futures (40%)
In terms of outsourcing of data services, the study found that 64% of fund managers have increased their level of outsourcing over the last two years. Going forward, 77% plan to outsource more between now and 2024, with none seeing a decrease. When asked which factors are fuelling the growing trend towards data services outsourcing, a shortage of qualified in-house subject matter experts and resources was cited as the biggest driver.
Half of those surveyed (50%) found negotiating with data vendors the most frustrating part of the data onboarding process, and 60% say that evaluating the different vendors is challenging.
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