The world’s super wealthy want more out of their investments these days.

In addition to financial returns, they want their money to drive positive change in the world, but the options for achieving both concurrently is lacking, according to a UBS expert.

The Swiss bank, the largest wealth manager globally, was referring to a money-making discipline known as sustainable investing . 

Some people like drinking alcohol, some people like smoking, some people like guns, so to tell investors they shouldn’t be doing it because it’s wrong, you’re straightaway not aligning with their values
Simon Smiles, chief investment officer, UBS Wealth Management

That is an umbrella term for investing in financial instruments that generate returns from doing good – or simply supporting something that’s not doing bad.

But many of the available investment products marketed as being socially responsible or sustainable just leave out financially risky companies, or firms deemed to be in the business of “vices”.

This was a method that did not resonate with all investors, said Simon Smiles, chief investment officer for ultra-high net worth at UBS Wealth Management.

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“It may turn out that you don’t want to invest in tobacco, firearms and alcohol, and so you don’t do that,” Smiles told CNBC in March. 

“But to assume that everyone has that same value is inherently problematic.

“Some people like drinking alcohol, some people like smoking, some people like guns, so to tell investors they shouldn’t be doing it because it’s wrong, you’re straightaway not aligning with their values. 

“[But] that’s the way a vast majority of sustainable investing products have been positioned.”  

Instead of avoiding “bad” companies and investing only in firms with good credit ratings, super-wealthy individuals wanted their portfolios to reflect what they believe in, Smiles said.

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That meant building a whole portfolio with investments that best represented their views on the world, he added. 

For example, investors who want a part in driving global development could choose bonds issued by institutions such as the World Bank and the Asian Development Bank, and those passionate about green efforts could invest in debt instruments that use proceeds to finance activities benefiting the environment.

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A vast proportion of opportunities across the industry focus on specific equities, specific funds, specific ETFs {exchange-traded funds that track an index, a commodity, bonds, or a basket of assets such as an index fund] rather than thinking of it in a portfolio context,” Smiles said.

He said that clients were not interested in strategies that exclude kinds of products from a portfolio or picked out single equities in a “piecemeal” fashion.

“Instead, the conversation’s more about: how do you ingrain sustainability in a coherent way across the entire portfolio?” he added.

The wealthy are still holding lots of cash

The mismatch between what was available in the market and what super-rich individuals wanted was one reason why sustainable investment made up a “still small” proportion in their portfolios, Smiles said.

That is despite the overall growth seen in sustainable investment. 

The latest biennial report by the Global Sustainable Investment Alliance published last year found that globally, the strategy grew 25 per cent between 2014 and 2016 to US$22.89 trillion. That is around 26.3 per cent of total assets under management.

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At the same time, the super wealthy were still holding onto large amounts of cash – a situation that had not changed much since the last global financial crisis, Smiles noted. 

A UBS survey last year found ultra-high net worth investors – those with at least US$30 million in investible assets – allocate as much as 35 per cent of their portfolios to cash.

Clients still, on average, hold more cash than what we’d recommend from an investment perspective. The memory of [the global financial crisis] is still fresh
Simon Smiles

Smiles said that UBS had been advising clients to invest some of that cash, especially now that the environment was still favourable for “risk assets” such as stocks.

“But clients still, on average, hold more cash than what we’d recommend from an investment perspective,” Smiles said. 

“The memory of [the global financial crisis] is still fresh enough for people to value significant cash balances more.”

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