A recent paper by Standard Life Investments (SLI) entitled ‘The Rise of Millennials and the Impact on Values-Based Investing’ highlighted that understanding this growing generation’s financial and consumer habits is likely to be very important to the investment industry.
The fund taps trends deemed specific to this demographic, such as the ‘digital revolution’, new methods of management and a business’ social commitments.
Millennials’ interest in health and well-being is also reflected in the fact the fund excludes tobacco and alcohol-related stocks.
This skews towards particular attitudes indicates the potential this market offers to SRI funds, and the point is reinforced in SLI’s publication.
Findings include that 81% of millennials had donated money, goods or services to charity, while 61% were worried about the state of the world and felt a personal responsibility to help make a difference.
Matt Christensen, head of responsible investing at AXA IM, also notes how this latest breed of consumers could impact SRI and believes they will invest first to improve society and second to generate profits.
Christensen believes female millennials, in particular, may be the most conscientious when it comes to investing.
‘With longer life expectancy, women are controlling an increasing amount of private wealth, and in our view, women may tend to be more receptive to social issues.’
Christensen said the trend is here to stay and says we will see responsible investment move from a specialist area to a ‘must have’.
Have your cake and eat it
But can a millennial investor have it both ways, or will the feel-good factor come at the cost of decent financial returns? Vicki Bakhshi, head of governance and sustainable investment at BMO Global Asset Management, says ESG funds will allow investors to have their cake and eat it.
‘We believe that there is a win-win here. Morgan Stanley reviewed over 10,000 US mutual funds and split them into mainstream strategies; those which were ethical and those which were SRI funds.
'They looked at it over seven years and for 64% of the time periods they analysed, sustainable options had equal or higher average returns and equal or lower volatility.’
‘So it just isn’t true that there is a trade-off, and in the long-term ESG strategies can help produce a stronger investment outcome.’
The investment world has already geared up for increasing investment activity in this area and over the past decade, more than 1,300 major global investment managers and asset owners have signed the Principles of Responsible Investment, which is designed to integrate ESG issues into the investment process.
However, not all investors see such a strong link between millennials and SRI. Bertrand Gacon, manager of the LO Gateway – Development Finance fund at Lombard Odier, believes the millennials trend is significant for the fund industry.
Unlike Athymis Gestion, Gacon doubts it would make sense for current portfolio managers to create strategies specifically based on millennials, but he does think this is a market they should be preparing for. He said it was more about impact than values associated with conventional SRI products.
‘Most of the wealth transfer has yet to happen, so if you were to target just millennials today, it would mean you wouldn’t have many clients. It’s more of a challenge for the entire industry because we know the size of this upcoming transfer is massive.’
Ketan Patel, manager of the EdenTree Global Equity Income Fund for Charities, agrees and thinks investors should focus on companies that are moving away from traditional channels of business towards multiple interfaces.
Patel believes this will in time allow them to capture revenues from all levels of the population, including millennials. Despite this, Patel also points out the dangers of simply following fads.
‘The challenge for ESG investment managers will be to identify the companies which will deliver in the long run and not be held hostage to fashion, which could lead to capital destruction for their clients.’
This article originally appeared in the September edition of the Citywire Selector magazine.