Personalized Managed Accounts: Aligning to your client’s values on their terms

Executive summary:

  • Choosing investments that align with individual beliefs is a growing trend
  • Our Personalized Managed Accounts program allows investors to customize their portfolio by allowing them to avoid sectors or fit a specific theme
  • Offering your clients the option to select a portfolio that supports their values can differentiate you from your peers

There has been a lot of noise lately about ESG (Environmental, Social and Governance), SRI (Socially Responsible Investing) and values-based investing. Why all the fuss?

When you invest in the capital markets, the primary goal is usually to receive a competitive return. But it may not be the only goal. Some people believe they can enact change through the power of buying—or intentionally choosing not to buy—stock in an individual company, industry or sector.

Unfortunately, like so many things today, ESG, SRI and values-based investing have become “hot button” issues and some people feel it’s their business to tell you what’s right and what’s wrong for your investment portfolio. I am not writing this blog to enlighten you if ESG, SRI or values-based investing is right for you and our society, but to express my belief that the only opinion that matters concerning how your clients choose to invest their assets is theirs! Not a TV pundit or a politician. And as their financial advisor, you can play a crucial role in guiding them on how to invest in a way that aligns with their individual beliefs.

One of the advantages of using Russell Investments Personalized Managed Accounts (PMA) – which includes direct indexing strategies in Separately Managed Accounts (SMA)-- is the ability to build an equity portfolio that is customized to your client’s investment goals and, if it’s important to them, their opinions on ESG, SRI and values-based investing. The investor can choose a particular strategy and indicate IF they want to exclude a particular company or sector of the economy.

There is even an option to create a portfolio based on certain themes such as “Catholic Values” which offers access to the portfolio you choose while excluding all companies that do not align with the values of the Catholic Church. Other themes available include Human Rights and Social Impact, as well as Environmental Impact. Of course, you can choose to not exclude any companies or apply any themes and instead simply invest in the entire index as well. It’s your client’s choice.

How does investing in a Personalized Managed Accounts SMA differ from investing in an ESG mutual fund?

Our PMA program can offer a few distinct advantages over investing in an ESG or SRI-focused mutual fund. When you invest in a mutual fund, you are relying on a portfolio manager to choose your investments for you. The investor has no choice in the individual companies the fund invests in. The portfolio manager may have a different opinion than the investor regarding which companies are socially responsible or environmentally friendly.

On the other hand, the PMA program can reflect an investor’s personal convictions: When an investor opens a PMA portfolio through Russell Investments, they have the final say in which companies are purchased and which are excluded.

Personalized Managed Accounts

How do you define which companies qualify as ESG or SRI?

I’m guessing you would be surprised if I told you that ExxonMobil Corp. is one of the most widely held companies in ESG funds1. Even though ExxonMobil is one of the most well-known fossil fuel companies in the world, it is also one of the most significant investors in green energy. It’s a safe bet (and very ironic) that many investors in ESG funds are looking to avoid oil and gas companies but end up owning one of the world’s largest oil companies.

Our PMA program allows you to simply exclude oil and gas companies from a client’s portfolio by checking that exclusion box when you initially invest2. In our experience, it seems that most people are more interested in investing in or avoiding companies or industry sectors they are passionate about rather than just choosing ESG funds in general but have not had the ability to customize the portfolio until now.

How might investing in ESG/SRI affect your client’s investment performance?

While many people invest in ESG/SRI for values-based reasons and are willing to give up potential gains in the sectors they avoid, there are others who believe that incorporating ESG/SRI screens into their portfolio can produce better results. While I am not here to debate this issue, I can highlight how incorporating ESG screens into your portfolio may affect how the overall portfolio is invested. Below is a chart comparing our Personalized Direct Index Large Cap SMA (which is based on the S&P 500) sector exposures with no restrictions, alongside the strategy excluding select oil and gas names.

You will see that by excluding the oil and gas category you are also increasing the weighting of all the other sectors of the index, thus taking bigger bets on technology, health care, etc. Obviously, if oil and gas companies have strong performance in a specific period, your portfolio’s return will underperform the index and vice versa. Investors who believe that oil and gas companies will not perform well in the future may consider excluding them from their portfolios not for a values-based reason but strictly from a performance argument.

Click image to enlarge PMA 01 PMA 02

PMA 02

As of 2/28/2023. For illustrative purposes only. The simulations are hypothetical in nature. Actual client experience may be different from the data presented. Please see Summary for the assumptions and specific constraints used for this analysis.

How can a financial advisor use ESG and SRI to build their business?

Financial advisors are beginning to embrace ESG/SRI/Values-Based investing to meet a growing demand in the marketplace. Many investors are looking for personalized investment strategies that align with their values and beliefs, and this demand is likely to grow in the coming years. By offering values-based investing options, you can tap into this growing market and position your business for long-term success. Advisors may find that incorporating values-based investing into their practice can lead to legacy planning conversations as the children of their clients may express a greater interest in the topic than their parents.

How you can differentiate yourself as an ESG advisor

It’s one thing to offer your clients a few ESG funds and another to offer them a customized solution which puts them in control of their choices. At Russell Investments, our PMA program offers the ability to opt out of any company the client wishes to exclude. In addition, the PMA program offers three exclusionary thematic screens: Catholic Values, Human Rights & Social Impact, and Environmental Impact. These thematic screens allow the advisor the ability to offer clients a pre-packaged solution to address specific beliefs they may want reflected in their portfolio. By partnering with Russell Investments an advisor can streamline their ESG process, thus saving them time to focus on deepening their existing relationships or developing new ones. 

Your client’s opinion is what matters. PMA helps you ensure their portfolio reflects that opinion.

In summary, everyone’s investment decisions are personal, and our PMA program offers an opportunity for you to customize your client’s portfolio in a way where the only opinion that matters is theirs. They are free to choose the equity benchmark that suits their investment goals and customize their portfolio in the way they see fit. Whether that means excluding certain companies or industries or staying fully invested, either way, you and your client are in control.

1 ExxonMobil Corp. Is one of the 10 largest constituents of the S&P 500 ESG Leaders Index https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-leaders-index/#overview

2Oil and gas companies: Sustainalytics - company is involved in oil and gas exploration, production, refining, transportation and/or storage with revenues in these activities exceeding 10% of total revenues.