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Asset Allocation Changes and Market Commentary

The SCM Direct investment team made no changes this month.

As the markets fear and focus on the coronavirus outbreak has lessened in recent weeks, the stronger than expected US corporate earnings (70% of earnings reported so far have beaten analyst estimates) have helped fuel a new peak for the US equity market (as measured by the S&P 500).

A substantial amount of this return has home from the performance of the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google (now called Alphabet). Last month, we analysed their extreme valuations and are pleased to say that SCM had zero exposure to the FAANG stocks and only a 0.7% equity weighting in Microsoft.

We would argue that our SCM Ethical Portfolio is different from many other ethical portfolios, as a recent article published by the Wall Street Journal suggests that “the most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were giants including Microsoft, Alphabet, and Apple”.

An analysis of the performance of our US holdings (held within the iShares MSCI USA SRI ETF) versus a typical S&P 500 low cost Index fund (Vanguard S&P 500 ETF used here) reveals that from  12/07/16 – 12/02/20 (the longest time period with available data), the iShares MSCI USA SRI ETF (shown in green below) returned 80.7% compared to only 69.4% for the Vanguard S&P 500 (shown in red) – both returns are in GBP.  The ethical US fund we hold  “screens out exposure to companies involved in industries such as Controversial Weapons, Nuclear Weapons, Tobacco, Civilian Firearms, Conventional Weapons, Alcohol, Gambling, Adult Entertainment, Nuclear Power and Genetically Modified Organism.”

Despite the outperformance, the underlying valuation of the stocks within the US equities ethical fund and its traditional S&P 500 peer, are very similar:

A closer examination of the sector breakdown of the ethical fund’s underlying holdings reveals a much lower weighting to technology stocks and communication services. Technology has certainly been a big driver for returns of the S&P 500, so it could be suggested that the Socially Responsible screening by iShares is adding ‘alpha’, compensating for this lower exposure with exposure to other outperforming stocks in its place.

For full underlying holdings, please download the excel document here