Market Insights

Renewable energy companies enjoyed considerable growth over the last decade, as the cost of solar and wind power technologies declined significantly. ”Renewables’ competitiveness with fossil fuels is strong, driven by considerable innovation, learning and economies of scale,” Lydia Miller, Portfolio Specialist at Dana Investment Advisors states in a recent Green Money Journal column. “We believe that the transition to a low-carbon economy is happening and will continue to happen. This happens over decades, with investors increasingly discounting this long-term trend.”

To say ESG has hit an inflection point would be putting it mildly. Flows into sustainable funds quadrupled to $21.4 billion in 2019. The first half of 2020 has nearly eclipsed that mark, with flows totaling $20.9 billion, according to Morningstar figures. But amid this surging demand, where do advisors fit?

The S&P 500 has hit new records in recent days, completing a round trip that has been remarkable, rapid, resilient … and risky.

In a span of just 126 trading days, the S&P 500 went from peak to new peak, with a 34% drop in between. Below we offer some short, but important, takeaways on how we got here, what investors should have learned, what we are concerned about, and how we are investing going forward.

As client demand for ESG strategies grows, advisors have a tough job ahead of them: finding a strategy that is suitable as a core equity holding. Without proper due diligence on fund construction, a strategy used as a core holding may expose a client to unintended risks.

The details are all in the portfolio construction process.

The future of the electric vehicle (EV) market has excited many ESG investors, and for good reason: It’s a classic example of an investment trend that has both substantial environmental benefits and significant growth potential. But for all the buzz, many investors may be viewing the opportunity set with too narrow a lens.

Most headlines and some retail investors associate electric vehicles with a single poster child company: Tesla. While Tesla’s history of innovation is indeed impressive, the investment opportunities that will stem from electric vehicle adoption and innovation are far more expansive.

This summer, with the help of our interns, we completed a deep dive into researching the growth potential of the electric vehicle market. A few takeaways demonstrate just how big the investment potential is, how fast the trend is moving and how far the investment opportunities expand:

The financial crisis was painful for anyone working on Wall Street, but the period gets credit for improving at least one industry dynamic: The bar for effective communication from an asset manager has been significantly raised.

As markets plummeted, advisors, consultants, investment committees and other key fund decision makers demanded dialogue from their portfolio managers about the market collapse and what they planned to do going forward. The demand for increased communication continues today, and is an industry trend we applaud.

Advisors and consultants deserve shared insight from their investment managers, and an open forum for communication. In short, they deserve true partnership. We believe boutique asset managers are best positioned to deliver the partnership clients deserve.

As investor interest in ESG grows, so too are the number of ESG strategies to choose from. Already, 23 ESG funds have launched in 2020, and more than 20 others are in registration at the SEC, according to Morningstar.¹ This marks the sixth straight year of more than 20 launches.

With more fund launches, due diligence isn’t getting any easier. We believe one way advisors and other allocators can help their clients find the right strategy is to ask whether they want a fund that is directly engaging businesses to improve corporate policy around ESG issues.

Many ESG funds do not engage management teams on policies, but instead rely on ESG ratings to screen out non-ESG friendly companies and include companies with better ratings. That may well be enough for some clients.

With growth stocks on a historical run of outperforming value, many allocators are wondering if mean reversion is due and are questioning their allocations to both style boxes. But growth or value may be the wrong question to ask.

As Dana portfolio managers explained in a recent Q&A on the ways active managers can differentiate their strategies, core strategies may provide optimal exposure. The Q&A also runs through a classic example of the perils of overpaying for growth, and touches on a less discussed benefit of core strategies: tax efficiency. As our portfolio managers explain:

ESG interest is growing and as asset flows follow, so too are the number of strategies dedicated to the space. For investment advisors, that makes the job of matching client objectives with the right strategy increasingly difficult.

In a recent Q&A session, Dana portfolio managers touched on the issue, and where their own ESG fund may – or may not – fit within a portfolio. A brief excerpt from the interview explains:

It’s hard to believe we are already halfway through 2020 – and what a ride it has been so far.

Our top three blogs for the year to date include insights on the fall into bear market territory, an almost equally quick rebound that seemed out of touch with economic reality, and an index that has more concentration risk than at any point over the last 30 years. These issues are still relevant today – give them a read and make some sense of the madness.

As always, we welcome your questions or comments. If you would like for us to cover a specific topic, we would love to hear from you. Just fill out the form on our contact us page and we will be in touch! 

Warmly,

Dana Investment Team