The White Paper on personal accounts may be stoking up problems actually delivering sufficient supply of SEE funds at a price in line with government policy commitments to capping costs.
SEE is the government’s own acronym for Social, Environmental and Ethical investment in personal accounts. It is a key part of the funds choice element of the proposed personal accounts regime, as part of a three-pronged approach also including a default fund and a small number of bulk-bought funds.
The ABI says through a spokesperson there is a danger of getting carried away with the details of what still remains a White Paper.
While containing some interesting ideas, it does seem the case the government has essentially handed over responsibility for actually delivering on the details to the delivery authority, set to initiate oversight of the personal accounts regime.
From the ABI’s perspective offering ethical funds or a mix of funds is perfectly in line with what is already being offered by its members.
However, where specialist funds are concerned it is also the case they are more expensive to run. Therefore, in view of the 30 basis points cost target put forward in the White Paper it means the government has to give some idea of how it is going to put the square peg of existing ethical fund costs into the round hole of price caps.
“Ethical funds are doable, but at a cost,” the ABI states.
Further input from the delivery authority (DA) on this matter is expected as it start to do its work, but much will depend on the people who are appointed to the investment committee the government wants to assist the DA on developing its investment strategy.
The ABI says whoever is appointed to the committee apart from the positions of chairman, chief executive and finance director set to be advertised on the open market, they must come with some hands-on experience of asset management or similar from the industry.
Speaking from the point of the nuts and bolts of fund management, F&C Asset Management director head of communications and strategy Jason Hollands says the issue of SEE raises questions of capacity constraints, depending on the type of definitions of ‘ethical’ used.
For example, he says for those intent on so-called “dark green” investments, it tends to be the case funds concentrate on small to mid-cap stocks rather than large-caps.
This suggests a wave of money from the 10 million people identified by Work and Pensions secretary John Hutton as benefiting from personal accounts could overwhelm any supply of such investments in the market, leading to asset pricing distortions.
The White Paper’s broader, or "light-green" definition of SEE funds indicates it would be those that seek to generally engage with companies to encourage more responsible business practices, in contrast to the dark-green approach of applying positive screening or specific filters to avoid investing in businesses not making the grade.
The White Paper mentions further work involving the Department for the Environment, Food and Rural Affairs to “remove barriers to SEE”, suggesting sectors such as food manufacturing could be brought into a broader definition of SEE over the objections of consumers, and personal account holders, who may see animal welfare as a key positive filter in determining what constitutes an ethical or environmental investment choice.
Friends Provident, which owns 51% of F&C and which earlier this year claimed more than £1bn of funds under management in its Stewardship Pension Fund, says in its general response to the White Paper it is disappointed with the lack of detail over who will run the scheme and at what total cost.
Julia Dreblow, SRI marketing manager at Friends Provident, does add, however, the provider welcomes the commitment to SEE.
“There is demand out there and we are pleased DWP has recognised this demand,” she says.
About FP’s 200,000 ethical investors are invested through pensions. The 10 million figure published by Hutton is, obviously, a huge increase on such an initial figure, but the industry should be able to step up to the challenge of adding product to meet demand in this area, Dreblow says.
It is also important to recognise the current ethical funds reflect historical investor demand. The direction of ethical investing may change as the new stream savers comes on line, but it is still the case the industry “will rise to the challenge.”
Dreblow says the dark versus light-green debate can be seen as a proxy for the debate on performance. However, evidence from existing dark-green funds suggests they do well already.
Figures from the IMA suggest ethical funds took a 1.1% market share in 2005, equivalent to some £4bn worth of funds under management. Some 46 ethical funds were available from its members in the third quarter of 2006, with net retail sales of about £23m during the period.
According to data from the UK Social Investment Forum, the value of UK SRI funds grew from less than £500m in 1989 to more than £4bn by 2003.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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