By Craig Simpson
The most common concern expressed with socially responsible investing (SRI) is you pay a premium and this diminishes your return.
The weight of academic research suggests this concern is unfounded.
Numerous studies conclude there is no discernible difference in the risk and return profile between a socially responsible fund and a mainstream fund. In some cases, the performance of socially responsible funds outperforms mainstream funds.
The chart below illustrates the outperformance of an exchange traded fund (ETF) with an ESG (Environmental, Social, and Governance) focus. The investment seeks to track the investment results of the MSCI USA ESG Select Index composed of U.S. companies that have positive environmental, social and governance characteristics.
We have compared the ETF to a US listed sin fund (ViceX) and the S&P 500 index. This illustration assumes $100 was invested into each of the securities at April 2008, is in US dollars and before any tax is deducted.
The New Zealand experience
There is only a small sample group from which investors can choose from within KiwiSaver and only a couple of the funds available have sufficient historical data to analyse.
This leaves us having to reflect on short-term performance. This is neither ideal nor indicative of what investors should be expecting from a long term SRI or ethical fund.
The KiwiSaver experience, albeit limited, on the surface does not echo the findings of overseas research.
Much of the research is based on the performance of market indices and does not reflect an actual investor's experience.
We are also faced with one of the managers that have a reasonably long track record, Craig's Investment Partners (now managed by Quay Street), undergoing a substantial management change in the last couple of years. Because of the changes to the fund's investment management team, the past performance can not be used to make any conclusions on how either this fund has performed over the long term or how SRI funds have behaved in general.
Nonetheless, this is what the data and some managers are telling us:
- On aggregate, the SRI funds with a balanced risk profile have been performing better than those with large exposures to international equities over the past 12-months. The reasons for this have been well documented in our various KiwiSaver regular reviews.
- Many of the KiwiSaver socially responsible funds appear in the top third of one research house's survey over the past 5 years to July 31. The survey is done on a before tax basis (0% PIR).
- The performance of some of the funds can also be linked to factors that are not directly related to SRI investment, namely: hedging, the underlying fund managers investment style based on their investment philosophy and the amount of cash they hold at any given time.
- The lack of economies of scale in SRI funds means the fees are slightly higher than desirable and this having a small drag on performance. Two managers in the last two years have closed down their SRI funds for commercial reasons, i.e. not enough members or funds under management to justify keeping the funds operating.
- Three-year regular savings returns from those funds with a long enough track record and who haven't undergone major changes in the management structure of the fund are trending below more traditional funds (based on our groupings) on an after tax and fees basis as we have calculated them using our regular savings return model.
- Only two funds from our sample universe have a long enough track record and they are the ANZ OneAnswer Sustainable Growth Fund and Grosvenor Socially Responsible Growth Fund. Both funds have underperformed the top funds in our Aggressive KiwiSaver category over the long term.
- We are only part way through an investment cycle and it is expected that those with more value style portfolios that have not chased the high growth companies should start to perform better when valuations normalise and markets turn.
- There is an increased interest in SRI investing and it is a trend KiwiSaver managers see continuing.
The table below shows the data we have collected and calculated for illustration purposes only. The data is as at 31 August 2016.
The 3 and 12-month data is the change in unit prices while the balance of the table shows the performance of the various funds using our unique regular savings return calculation methodology.
Grosvenor is the clear leader in terms of changes in unit price values over the past 12 months.
Our return methodology shows a different set of returns from what the fund managers publish as our data is calculated after tax and fees. We believe that after tax and fee return data based on a regular savings model provide meaningful comparisons for the average KiwiSaver investor.
Please note that the Amanah, Craigs IP, and Grosvenor Balanced funds returns are based on shorter investment time periods so are not directly comparable to others in their peer group.
In all cases, the SRI or ethical funds are underperforming the top funds in their respective KiwiSaver category.
Some surveys and fund manager return data may show different results depending on how their returns are calculated and displayed.
|Fund||3 month return (change in unit price - after fees, before tax)||12 month return (change in unit price - after fees, before tax)||3 yr return - regular savings basis (after tax and fees)||Long run return - regular savings basis (after tax and fees)||Top KiwiSaver Fund long run return - regular savings basis (after tax and fees)|
|Amanah Ethical Growth Fund||-6.0%||-10.8%||n/a||-0.8%||13.7%|
|Craigs Investment Partners SRI Balanced Fund||-0.4%||2.4%||5.4%||6.1%||9.8%|
|Grosvenor SRI Balanced||1.7%||7.5%||n/a||7.8%||9.0%|
|Grosvenor SRI Growth||1.3%||7.7%||7.2%||8.3%||13.7%|
|OneAnswer Sustainable Growth Fund||-5.2%||-10.3%||6.1%||6.4%||13.7%|
Plenty of noise but no action
Some of the return data doesn't stack up on a relative basis, however, given the lack of data and small population you can't make a meaningful assessment of how SRI or ethical funds perform compared to mainstream investment options over the long term.
With all the fuss in the media about socially responsible investing and the subsequent pressure on fund managers to change their wicked ways, we are yet to see or hear of, any significant switching.
It appears KiwiSavers aren't prepared to put their money where their mouths are.
The number of members in Socially Responsible alternatives remain small and in some cases, the funds would not be commercially viable on a standalone basis. In the past two years, some of the SRI funds have closed as they did not attract sufficient numbers to warrant keeping the funds open.
For the fees on these funds to come down and remain a viable alternative within KiwiSaver these funds have to be supported so they can achieve the necessary economies of scale.
Without these necessary economies of scale, investors are going to be paying a premium for doing good.
*Craig Simpson is a shareholder in the management company that runs the Amanah Ethical KiwiSaver Fund. The opinions expressed in this article are his own.