Global, ESG ‘all-weather’ investment portfolio in a nutshell
We wanted a single, diversified portfolio filtered for environmental, social and governance (ESG) considerations and based on all-weather investment principles. This kind of portfolio, designed to manage down-side risk in any economic environment, has received increased interest since the large economic downturn associated with COVID-19.
This blog shares our attempt at implementing this strategy using securities available on the Australian Securities Exchange (ASX). The result is a broadly diversified ESG-conscious all-weather portfolio that is risk balanced across asset classes. We are refining our strategy over time and the portfolio shared here captures our current approach.
You can find the story behind why we chose this approach and our methodology in our August 2019 blog - Global all-weather portfolios - investment adventures of an Aussie couple.
Also check out Dan’s recent update showing how the strategy outlined in the August 2019 blog has performed so far during the COVID-19 epidemic.
So without further ado, here is our global, ESG filtered, all-weather portfolio
The table below shows the target weights and ASX tickers for each asset type. The portfolio requires rebalancing (e.g. annually) to maintain target weights.
Table 1. Our global ESG all-weather portfolio
| ASX ticker | Portfolio Weight | Asset Class | Region |
|---|---|---|---|
| VESG | 19.2% | Equities | International (Developed Markets) |
| FAIR | 6.0% | Equities | Australian |
| VGE | 2.4% | Equities | International (Emerging Markets) |
| VIF | 40.0% | Government Bonds (medium term) | International (Developed Markets) |
| GSBE47* | 4.0% | Government Bonds (long term) | Australian |
| ILB | 4.2% | Government Bonds (inflation linked) | Australian |
| IGB | 3.0% | Government Bonds (medium term) | Australian |
| IHEB | 8.0% | Emerging Market Credit | International (Emerging Markets) |
| PMGOLD | 7.0% | Gold | Universal |
| QCB | 6.2% | Commodities | Universal |
The portfolio’s equities and bonds exposure are 20 percent Australian and 80 percent international. The 100 percent equities portfolio in Figure 1. below is also 20 percent Australian and 80 percent international (20% VAS; 80% VGS).
Figure 1. below shows how this portfolio has performed compared to a 100 percent equities portfolio in the period since August 2019. It shows that, as expected in a large economic downturn, the global ESG filtered all-weather portfolio has had superior returns and smaller drawdowns compared to 100 percent equities.
Figure 1. Performance of global ESG all-weather portfolio compared to global equities portfolio in the period August 2019 to April 2020 . The relevant ASX-listed securities and target weights are shown in Table 1. The global equities portfolio is constructed from ASX-listed securities (20% VAS; 80% VGS). Longer-term historic performance data is not available for VESG - see here for plots showing historic performance based on the indexes shown in our August 2019 blog.
Note these simulated results do not include brokerage fees and assume the desired portfolio balance is maintained throughout. In practice, the portfolio would be rebalanced periodically (e.g. annually). Simulated historical performance results have inherent limitations since unlike an actual performance record, simulations do not reflect the cost of trading or the impact of actual trades on market factors such as volume and liquidity.
To be clear, we are in no way able to provide financial advice and are not trying to convince anyone this is the right strategy for them. We simply share our research and results in case it is interesting to others.
ESG / responsible investment considerations
We have chosen developed market equity funds which exclude companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment (Vanguard Ethically Conscious International Shares Index ETF ‘VESG’ and BetaShares Australian Sustainability Leaders ETF ‘FAIR’ - see Table 1).
FAIR’s methodology also preferences companies classified as “Sustainability Leaders” based on their involvement in sustainable business activities.
Note on fees
Among other things, it is important to consider the impact of brokerage and other fees on overall portfolio performance. Brokerage fees apply when buying and selling ETFs. Since this strategy involves holding a number of ETFs (see Table 1 above) and rebalancing the portfolio periodically to maintain target weights, brokerage fees make this kind of strategy less competitive for smaller portfolios (e.g. portfolios with a total value less than A$50,000) than it is for larger portfolios.
*Long-term Australian Government exchange-traded bonds (ETBs)
Currently there are no ETFs on the ASX that track long-term (over 20 years to maturity) Australian bonds. But there are individual long-term Australian Government exchange-traded bonds (ETBs). A full list of ETBs is available here.
To maintain exposure to long-term governments bonds we need to periodically update the ETB. For example, we currently hold ETB ‘GSBE47’ which matures in 2047 (i.e. in 27 years). After 2027, the years to maturity will be less than 20 years, so down the track we will need to replace this with an ETB with a later maturity date.