Sparrows Capital has launched a range of ESG portfolios on its platform-based model portfolio service, SCore MPS, aimed at financial advisers.
The SCore Responsible MPS comprises 11 portfolios containing equity exposures rising from zero to 100 per cent, in 10 per cent increments. This is designed to allow advisers to select the risk level appropriate for each client’s attitude to risk. The portfolios are globally diversified, multi-asset and liquid, with sterling as the base currency.
Investment Manager, Mark Northway (pictured) explains that the ESG portfolios join the firm’s existing factor-based portfolio, the SCore MPS. The firm has been managing money since 2008 in an evidence-based portfolio strategy, initially for an Israeli family, and since 2014 as a fund manager offering its services to wealth managers and financial advisers.
“We are a unique business that has traversed both the global financial crisis and Covid,” Northway says. Launching in July 2008 was a baptism of fire, Northway, says but the firm impressed its family office investors with the management of its money during a time of financial volatility, and came out the other side in good shape. “We have now built the business to bring in other money under the same management style,” he says.
There are 14 in the team, not all full time, and the firm very specifically invests in evidence-based investing, looking at academic studies across 125 odd years of reliable market data and conclusions.
“The vast majority of returns depend on how you set out,” Northway says. “Certain risks attract a persistent premium such as factor-investing – there is a recognition that stock picking and market timing rarely add value.”
In terms of the firm’s ESG credentials, Sparrow Capital has Professor Elroy Dimson as a consultant to the board. Dimson is on the ESG Committee for the FTSE Group, co-directs the Centre for Endowment Asset Management at Cambridge Judge Business School and is Emeritus Professor of Finance at London Business School.
Dimson was formerly the chair of the Strategic Investment Council for the Norwegian sovereign wealth fund, which at the time was the largest sovereign endowment and invested in the evidence-based style that Sparrows Capital favours.
The evidence-based approach is entirely delivered through portfolios of ETFs and index funds. For Northway, alternative approaches do not work.
“Active funds produce a larger index minus (because of their costs) and a wider dispersion of returns,” he says. “Wealth managers do even worse due to behavioural bias – defending the wealth of their clients as reason for existing – they have a poor record of taking risk off and then putting it back at the wrong moment. Intervention by the end investor produces the poorest result of all.”
The firm doesn’t disclose its assets but confirms they are less than half a billion. They also espouse what they call a disruptive fee policy. Their charges are 10 basis points per annum, capped at GBP20 per client per month. “This means that people with reasonable sized portfolios of GBP500,000 pay less than 5 bps per annum,” Northway says. “As the portfolio size grows, the fees continue to reduce. Price disruption is a major part of what we are about.”
The firm uses index funds and ETFs to complement its low-cost offering. “The fee structures around ETFs are so well-honed that it is often cheaper to own the ETF than the equivalent index fund,” Northway says. “ETFs also offer the additional benefit of intraday liquidity but it’s not something that investors tend to need.” Index funds are largely used where they are cheaper, on the broad-based index funds for instance. “In most cases we find that the product availability and diversity in index funds is a lot lower than in ETFs.”
Some UK financial advisers still have concerns about investing in ETFs. “Many of those concerns are historical,” Northway says. “On certain legacy platforms using ETFs can be expensive due to irrational transaction costs while some platforms are still not able to handle fractional holdings of ETFs.
“Some advisers are simply used to dealing with the fund structure and they prefer to stay with funds.” For that reason, Sparrows Capital offers its Factor and Responsible MPS portfolios in either hybrid (ETF and index fund) or fund-only variants. “But if you build a fund only portfolio, the product availability is significantly reduced. Our preference is to deliver the hybrid portfolios.”
The launch of an ESG managed portfolio service follows many years of managing money for their family office and other clients using ESG and SRI filters.
“We regard ESG slightly differently from others,” he says. “The marketing machine suggests that there is an incremental return associated with virtuous investing, but this has historically not been the case. But for the last seven to 10 years, the returns from high ESG ranking stocks have been flattered by the momentum effect of a huge transfer of capital from sin stocks to virtue stocks. As capital moves from asset type A to asset type B the former will tend to lag and the latter will outperform.”
The result of that momentum has been a solid outperformance by virtue stocks in recent years but Northway warns that once that capital flow stabilises some element of reversion towards the longer-term mean should be expected.
The contentious question is whether ESG is a factor or a filter, Northway says. “Our clear recommendation to an investor is to assume it is a filter. Investors should adopt socially responsible investing for reasons of conscience rather than in expectation of improved performance,” he says.
The firm’s conversations with different types of clients have produced quite varied responses on the desire for an ESG overlay.
“Interestingly some charitable institutions take the view that what they do in their giving and operational processes is the socially responsible element of their mandate but that when it comes to investing money they invest without a filter.
“Many high net worth individuals and families have a clear interest in philanthropy and in doing good through their investment portfolios. Advisers have also welcomed ESG/SRI investment processes – some as a specialist alternative for certain clients, but others as part of a fully socially responsible business model.”
At this point, Sparrows Capital’s two model portfolio ranges (SCore Factor MPS and SCore Responsible MPS) are effectively mutually exclusive. Northway says: “Product providers have not found any robust way to combine factor investing with ESG/SRI processes, so for now these disciplines remain distinct from each other. As always, we will monitor academic debate on this subject and hone our own offering accordingly.”