Watch out for equity gambles in the guise of ESG investment

Last year, the UK’s Financial Conduct Authority issued a warning about investment apps. The “game-like elements” of some apps (badges, points, leaderboards, fun post-deal messages) “could cause problems or even be gambling”, investment house action. With new legislation coming into force, companies that rely on gamification to conduct trading may want to reconsider what they’ve done.

This is an unspoken threat from the FCA, so a discussion about what level of gamification is good (attracting new audiences) and what is bad (making users borrow money and spend it stupidly) is in progress. But if regulators are concerned about the spread of stock gambling, are they looking in the right place? Most of them have auto-enrollment annuities and seem to be attracted to low-cost index funds.

Vanguard notes that 74% of UK clients who signed up last year were under the age of 45 and 41% were under the age of 30. His Hargreaves Lansdown, the UK’s most prominent investment platform (no in-app points), has also reported an increase in young investors opening accounts since the pandemic. Its users are not looking to top trader boards.

So who should the FCA watch out for? We recommend a professional fund manager. Look what they’ve been up to. These people should know that valuation matters. In other words, it is the price you pay for an asset that determines your return. They know that diversification is also important. They also argue that a rapid increase in the money supply leads to inflation (albeit with Milton Friedman’s “long and fluctuating” lag), that inflation means higher interest rates, and that higher interest rates lead to higher-value stocks. I know that will struggle.

But what did many of these professionals do in 2021? They invested in expensive American tech stocks and became obsessed with environmental, social, and corporate governance (ESG) goals. Not only did the latter limit the investment universe, but there was no long-term evidence that it was a good idea. Gambling for a short-term dopamine hit? who is guilty now?

The Hypatia Women CEO ETF from Hypatia Invests, which provides “gender-lensed indices” such as the Hypatia Women CEO Index and the Women Hedge Fund Index. The former, or suggests chasing 115 publicly traded U.S. companies with market caps above her $500 million and run by women.

The company says there are three good reasons to invest. Diversification, Investing in Value, and Creating Impact. that’s nice. Who doesn’t want all this? But in my experience, most investors also want something else: returns. can they get them? The ad says yes. The index has performed admirably in 2022, significantly outperforming the FT Wiltshire Small Cap Index. He has also outperformed the index by 3.04 points since 2017. Or it could be the fact that the best-performing stock in the S&P 500 last year (Occidental Petroleum, up about 118% in 2022) is run by women. Maybe it’s because it’s run by a woman, or because it’s an oil and gas company. who can know? But the fact that this isn’t clear means it’s hard to argue that companies run by female CEOs are better in the long run.

Not necessarily because women think and act differently, but because, as an old McKinsey report suggests, it’s very difficult for this generation of women to come out on top. It’s entirely possible that the few who have achieved it are particularly brave, talented, and resilient. But as good as this sounds, much like ESG, we don’t really have the data to know.

In various market conditions, there have not been enough female CEOs for a sufficient period of time. It is also not easy for a man to become CEO. There is a little more evidence that many female leaders or generally diverse executive groups in companies improve performance and that female-led companies have more gender diversity at higher levels. Investment products pander to this idea, but again, not enough to be certain.

Building a portfolio with compelling but unproven ideas is a gamble. Limit your investment universe and ignore valuations. This might have been fine for a big bubble that started deflating in 2022. In 2023, it’s ridiculous. In today’s day and age, why would an investor use an unproven metric (CEO’s gender) instead of one known to work (valuation and variance)?

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investing. ©Bloomberg

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