Expanding Product Ranges in the Investment Landscape: What It Means for Investors and Advisers
In the ever-evolving world of investment management, competition among fund groups is intensifying as they strive to expand and diversify their product ranges. This trend is driven by several key factors, including the increasing demand for tailored investment solutions, the need for better diversification, and the growing importance of sustainable and environmentally conscious investments.
Diversification and Concentration Risk
One of the primary drivers behind the expansion of product ranges is the need to mitigate concentration risk. Traditional equity indices, particularly those weighted by market capitalisation, have seen a significant increase in the dominance of US stocks and a handful of mega-cap companies. This concentration can lead to highly skewed portfolios, making them vulnerable to market fluctuations. To address this, fund groups like Legal & General (L&G) are launching new index funds designed to offer broader exposure.
For instance, L&G’s recent introduction of the MSCI ACWI IMI Equity Index Fund provides investors with access to a global equity universe, covering approximately 99% of the investible equity opportunity set. This includes emerging markets and small-cap issuers, which can help reduce concentration risk and enhance portfolio diversification.
Sustainable and ESG Investments
Sustainability and Environmental, Social, and Governance (ESG) considerations are becoming increasingly pivotal in investment decisions. The regulatory landscape is evolving to support this trend, with initiatives such as the Corporate Sustainability Reporting Directive (CSRD) in Europe and the UK Sustainability Disclosure Requirements (SDR) product labelling. These measures aim to enhance transparency and accountability, making it easier for asset owners to allocate funds to sustainable investments.
L&G’s Future World Infrastructure Index Fund is a prime example of this shift. This fund invests in listed infrastructure companies with strong environmental credentials, aiming for a 50% initial reduction in carbon intensity. It tracks the Solactive L&G Climate Enhanced Infrastructure Index, which favours companies with robust environmental performance. This approach not only provides climate-aware exposure to global listed infrastructure but also aligns with L&G’s Climate Impact Pledge, engaging with large companies to adapt their business models to meet global climate change goals.
Alternative Investment Offerings
Beyond traditional equity and bond funds, there is a growing interest in alternative investment offerings. Private credit, evergreen or hybrid fund structures, and other alternative assets are gaining traction. These investments offer diversification benefits and can provide access to new revenue streams.
For example, private credit assets have experienced double-digit annual growth, reaching over $2.1 trillion in 2023. Investment managers are now offering unlisted Business Development Companies (BDCs) and other SEC-registered structures to provide alternative investment exposure to accredited investors.
Place-Based Impact Investments
Another emerging trend is place-based impact investing (PBII), which aligns financial returns with ESG outcomes by focusing on local or regional projects. This approach is particularly relevant in the UK, where Local Government Pension Schemes (LGPS) and Defined Contribution (DC) pensions are being directed towards local infrastructure and businesses. Collaborations between pension pools and regional authorities have been instrumental in channelling capital into place-based projects, such as improved housing and clean-energy infrastructure.
Educational Role of Financial Advisers
Financial advisers play a crucial role in educating investors about the benefits and complexities of these new investment products. As investment managers expand their product lines, they are also investing in educational resources to help advisers understand and communicate the value of these investments to their clients.
This includes providing platforms and materials that explain the potential benefits and risks associated with alternative investments, such as private credit and sustainable infrastructure funds.
Conclusion
The expansion of product ranges by fund groups is a response to the evolving needs of investors and the changing regulatory environment. By offering more diversified and sustainable investment options, these fund groups are helping investors manage risk, achieve better returns, and align their investments with their values.
For investors and financial advisers at Cutts & Co Accountancy, this means there are more tools available to construct well-rounded and resilient portfolios. Whether it is through broadening equity exposure, investing in sustainable infrastructure, or exploring alternative assets, the key is to ensure that investment strategies are tailored to individual needs and risk appetites.
As the investment landscape continues to evolve, staying informed about these trends and leveraging the expertise of financial advisers will be crucial for making informed investment decisions. By doing so, investors can better navigate the complexities of the market and achieve their long-term financial goals.
