Morningstar - Q1 2022 - 13

because the advance occurred when the
Federal Reserve was vigorously creating money,
which presumably would lead to future
inflation. On the other hand, crypto profited
as the inflation rate dwindled. It's hard to know
how to score this stage.
Stage 4
Strong Bitcoin, Low Inflation, Flat Rates
The fourth stage ran from May 2020
through April 2021. Global economies struggled
throughout the period. Due to COVID-19
shutdowns, production declined, accompanied
by steep unemployment. Across the
developed world, interest rates were virtually
nil, and inflation was very low, although
it did increase near the end of the period. Bitcoin
boomed. During those 11 months, it gained
more than 600%.
This time, the investor expectations argument
openly flops. In November 2020, a survey
of economic forecasters predicted a 2.1% U.S.
inflation rate in 2021, followed by a slightly
lower rate for the rest of the decade. In no way,
shape, or form did the November 2020
marketplace anticipate this year's inflationary
spike. Yet by that date, bitcoin had already
quadrupled from its March low.
Stage 5
Flat Bitcoin, Rising Inflation, Flat Rates
The most recent stage needs little discussion.
Inflation has been sharply higher, leading
to much public handwringing. Yet global central
banks, including the Federal Reserve, have
not raised interest rates. By and large, government
economists downplay the possibility of
renewed inflation, arguing instead that rates
should remain unusually low, to support
economic expansion.
This would seem to be the ideal investment
climate for cryptocurrency, even more than
Stage 1. Inflation is flourishing, without
countermeasures from central bankers. Yet bitcoin
has dogpaddled. When I wrote a first draft
of this piece in mid-November, one bitcoin cost
around $59,000, about $4,000 below its
April 15 closing price. By early December, it
was at $48,000.
Jury Still Out
Bitcoin may indeed be an inflation hedge, but
it has yet to prove that attribute. Until it
does, it should be owned for other reasons. K
John Rekenthaler is a vice president at Morningstar
Research Services LLC. He is quick to point out that the
views expressed in Ivory Towers are his own.
Most critically, the proposal would lift rules that
made it extremely difficult and risky for
employers that wanted to use investment options
with ESG considerations as default investments for
workers they automatically enrolled in a qualified
plan. Most people gain access to retirement
investments through these defaults when they are
available, so undoing this rule is key to
mainstreaming ESG.
DOL Reopens Door to
ESG Investing
What advisors should
expect and do.
Aron Szapiro
POLICY
The U.S. Department of Labor has proposed
a new rule that would make it much easier for
employers to offer investments in their workplace
retirement plans that take environmental,
social, and governance information into account.
In doing so, the department has started the
process to shift course dramatically from
the Trump administration, which tried to raise
significant barriers for retirement plans that
wished to incorporate ESG considerations into
their investment strategies. Morningstar
thinks these considerations can be financially
material, so I believe this new proposal will
improve outcomes for investors who are
saving for retirement. While this is only a proposal,
I expect it to be approved by early 2022.
What the Proposal Would (and Would Not) Do
The most important part of the proposal
is more about what it would undo rather than
what it would do.
Unlike the current regulations, which require
additional analysis for plans to consider
ESG in their investment selections, this proposal
provides several examples and clarifications
to make it clear that ESG considerations
can be financially material. Similarly, the
Department of Labor also clarifies how and when
plan fiduciaries can consider ESG as part of a
tiebreaker test. The upshot is that the rule
would make it much easier to consider ESG
information as part of a plan fiduciary's approach
to selecting investments, without special or
additional documentation.
The rule would also put more responsibility
on employer-sponsored plans to vote on
shareholder resolutions on behalf of their
participants. While I initially thought this issue
would primarily matter for defined-benefit
pensions, as asset managers such as
BlackRock BLK start to allow institutional clients
to vote proxies on assets they manage, this
change could give plan sponsors a bigger voice
in the resolution process.
An Important Step in the Right Direction
As Morningstar has argued for some
time, the Department of Labor's new proposal
is consistent with common practices that
asset managers and financial advisors use to
integrate ESG considerations into their
investment processes and selections. Because
of previous rulemaking at the tail end
of the Trump administration, employers shied
away from assessing ESG risks in selecting
investments. Indeed, since most participants
use qualified default investment alternatives-
and ESG considerations were previously
barred in these options-most participants
would not get the benefits that ESG risk
analysis can deliver.
morningstar.com/products/magazine
13
https://www.morningstar.com/authors/208/john-rekenthaler https://www.morningstar.com/authors/2015/aron-szapiro http://www.morningstar.com/products/magazine
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