One of the mooted attractions of the separately managed account (SMA) vehicle for investors is that it offers a high degree of individualisation – that’s what the S means – and that ability fits in very closely with another TNA (three-word acronym), in ESG (environmental, social and governance) investing.
Recognising that ESG is an important consideration for its SMA investors, Melbourne-based superannuation and wealth manager Nucleus Wealth has introduced a “diversity” option for its actively managed SMA portfolios. The screening option allows investors to remove from their portfolios companies that do not have gender diversity in their management.
The wealth manager introduced the screen in response to a growing stream of diversity issues that have emerged in recent months, in particular, AMP’s lack of gender diversity on its board and management committee; and its decision to appoint an executive with a verbal sexual harassment record to lead AMP Capital.
Damien Klassen, head of investment at Nucleus Wealth, says diversity is becoming more important as a consideration for a lot of clients, leading the firm to add it as an ethical exclusion criterion.
“Diversity issues have exploded into the global zeitgeist over the past few months as Black Lives Matter protests have rocked cities around the world,” Klassen says. “Locally, AMP’s decision to appoint and executive with a (verbal) sexual harassment transgression on his file to a CEO position has focussed attention on the group’s lack of females on its board (one) and management committee (one).”
Nucleus Wealth’s SMA portfolios are tailored for risk, income, retirement timeframe, superannuation, and clients’ ESG considerations – and diversity is simply one of the latter category, says Klassen.
“The option gives investors the option to remove companies from their portfolio that they feel don’t have enough gender diversity in their board and management team. In an investment climate where diversity, specifically gender and race, are front-of-mind issues in the community generally two questions are suddenly more prominent. Does diversity improve financial performance? And, how can I, as an individual investor, express a preference for companies with diverse boards and management?” says Klassen.
Ultimately, this is what an SMA is all about, he says – it gives people back control of what they invest in.
“We manage stocks drawn from the domain of the 1600-company MSSCI World Index, a common
investing benchmark containing only very large companies. We have about 100 stocks in the portfolio, about 60–70 international stocks, and about 30 Australian stocks, and people can screen and dice them anyway they like. So, the ability is there for people to say, in this example, ‘I don’t want AMP in my portfolio,’ if they choose.”
In a portfolio of that size, Klassen concedes that removing one or two stocks, realistically, is unlikely to make a meaningful impact to return. “Then again, it’s worthwhile if it’s meaningful to you. We’re putting the decision back to the individual,” he says.
Klassen notes that from an investment perspective, diversity is an “interesting” concept.
“There have been a lot of studies into the diversity of gender and race on company performance with, yes, diverse results. It still appears to be a good, but far from infallible, indicator of more innovative companies.
“On the positive side, group diversity increases networks, resources, creativity, and, importantly, innovation. On the negative side, more diversity can lead to less communication, increase group conflict, lower satisfaction and increased staff turnover. From a quantitative perspective, corporate governance is a factor that outperforms – that is, companies with good corporate governance tend to perform better than those with weak corporate governance,” he says.
It is no different from an investor stipulating no fossil-fuel producers, he says. “That is the beauty of – and the reason for – using the SMA vehicle. It means that investors can filter investments for all major ESG and responsible-investment metrics – including, now, diversity. We see it as simply allowing investors a deeper, more bespoke approach to ESG,” says Klassen.