Bonds are back in play, interest in sustainable investing remains mixed

For Swiss independent wealth managers (WMs), the past year has been a period of shifting priorities. Rising interest rates and unclear economic conditions have led WMs to adjust their asset allocations. As a result, bonds are seeing a revival, while US equities are being reduced. Interestingly, the rapid growth in sustainable investments in the broader financial services industry is not reflected among WMs, who are more divided in their approach to sustainability issues. Our survey, the "VSV-ASG Investment Pulse 2023", now in its second year, offers fresh insights into how WMs are navigating the challenges of 2023. The full report can be downloaded here.

Dr. oec. Manfred Stüttgen Professor for Banking, Lucerne University of Applied Sciences

Nadine Berchtold  Senior Research Associate, Institute of Financial Services Zug IFZ, Lucerne University of Applied Sciences

Asset allocation: bonds are back in play

In last year’s survey, we anticipated rising interest rates would lead to shifts in asset allocations. Indeed, this year’s survey found that WMs are increasing their weightings in bonds while reducing their exposure to equities. Within their equity allocations, WMs remain overweight in Swiss equities but underweight for all other regions, including US equities. In terms of their fixed income allocations, WMs remain underweight in bonds, but not to the same extent as last year. Demand is increasing for Swiss, European and US government bonds, as well as for corporate bonds. WMs still tend to favour investing directly in markets that are closer to their home region. In emerging markets and the Asia-Pacific region, WMs prefer investing through funds and ETFs – a trend that is becoming increasingly popular. For Swiss and European equities, as well as corporate bonds, WMs favour active investments over index and passive investments. However, for government bonds, they prefer index and passive investment options, which are also gaining in popularity in other asset categories as well. ETFs are the most popular option in the market for index and passive investments, although index funds are gaining in popularity, particularly for bond investments.

Interest in sustainable investing remains mixed

Only a quarter of WMs in our survey incorporate sustainability criteria into their investment processes, while more than a third of the respondents do not consider sustainability criteria at all when choosing their investments. Interestingly, this year’s results show growth at both ends of the spectrum, indicating an increased polarisation between adopters and non-adopters of sustainability approaches compared to last year, see figure 1.

Figure 1: Do you include sustainability criteria into your investment process?
 

There is a noticeable disparity in the adoption of sustainability criteria, though, between large wealth managers (AuM > CHF 200 million) and small wealth managers (AuM < CHF 199 million). Study data shows that 28 percent of large wealth managers consistently integrate ESG criteria into their investment processes, whereas only 22 percent of small wealth managers do the same. It is worth noting that this trend might undergo transformation in the future as sustainable investing gains more widespread acceptance.

Two key barriers to sustainable investments

WMs perceive two key barriers to implementing sustainability strategies in their asset allocations. Firstly, a lack of reliable sustainability data and standards; and secondly, a belief that sustainable investments may not offer an optimal risk-return profile, see figure 2.

Figure 2: How important are the following barriers?
 

Interestingly, WMs who never incorporate sustainability criteria tend to view the risk-return profile as a more significant barrier compared to those who always consider sustainability criteria. When WMs incorporate sustainable investing, they generally prefer two sustainable strategies: Screening (positive/best-in-class selection and negative selection) and sustainable thematic investments. Positive/best-in-class screenings in particular are more commonly used by WMs who always include sustainability criteria in their investment processes. When assessing the sustainability of investment products, WMs typically leverage multiple resources for information. In general, WMs rely more heavily on external resources, rather than internal research, to assess sustainability. Larger WMs are slightly more likely to use internal research than smaller WMs.

Conclusion and Outlook

WMs have swiftly adapted their asset allocations in a time of rising interest rates: fixed income investments are seen as increasingly attractive and we expect this trend to continue. Sustainable investing, however, is still seen as controversial. We anticipate, that some of the perceived barriers, e.g., lack of data and standards, will continually be lowered and an increased (self-)regulation within Switzerland and the European Union will further push ESG-approaches. Implementing sustainable investing requires resources, though, and larger WMs seem to be better equipped to address this challenge than smaller WMs.

The upcoming VSV-ASG Investment Pulse 2024 will shed further light on these trends and will show how Swiss independent wealth managers are navigating the challenges to come.

Biographies

Manfred Stüttgen, Dr. oec., is a Professor for Banking at the Lucerne University of Applied Sciences. He has been a senior manager in the financial services industry for more than 20 years. His latest book titled «Nachhaltig investieren. Grundlagen – Strategien – Umsetzung» has recently been published with NZZ Libro.

Nadine Berchtold is a senior research associate at the Institute of Financial Services Zug IFZ at the Lucerne University of Applied Sciences. She has many years of professional experience at Swiss retail banks and also as a business consultant. She received her Master's degree in Banking & Finance and is currently pursuing her PhD in Finance.