How ethical funds benefit client portfolios

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The myth that ethical investment means sacrificing performance has been busted. Here are some of the additional benefits of ethical funds for client portfolios.

The 2018 Responsible Investment Benchmark Report by the Responsible Investment Association of Australasia shows Australian ‘core’ responsible share funds outperformed mainstream funds over three, five, and 10-year periods.

But what are the additional benefits of ethical managed funds for your clients’ portfolios? Let’s take a quick look at the top five benefits with reference to Australian Ethical’s range of managed funds.

Less volatility

Ethical fund managers tend to reduce their available universe of stocks through negative and, in Australian Ethical’s case, positive screening. As a result, people often mistakenly assume that ethical managed funds are riskier (ie, more volatile) than typical managed funds. Australian Ethical’s experience demonstrates this is not the case. Indeed, our flagship Australian Shares Fund has consistently outperformed its peer group while also displaying lower volatility.

Over the 10 years to 31 December 2018 the Australian Shares Fund has been less volatile than the S&P/ASX 200 Accumulation Index. This is despite the fact that the fund has historically had circa 60% exposure to small caps, which tend to be more volatile than large cap stocks. As a result, your clients will get exposure to exciting small cap opportunities in the healthcare, renewable energy and technology sectors with less ‘risk’ than a typical Australian equities fund.

Higher returns with defensive characteristics

The Australian Shares Fund outperformed the market and peers during the market downturn in the final quarter of 2018 and, more significantly, during the GFC where the fund outperformed the S&P/ASX 200 index by over 20 percentage points! Conversely, we tend to underperform in strong bull markets. But what we have seen is that over the full market cycle the fund delivers superior returns with lower volatility.

Please note that the return of capital and the performance of your investment in any of the Australian Ethical funds are not guaranteed. Past performance is not a reliable indicator of future performance.

Lower correlation

The portfolio of the Australian Shares Fund is very different to the market indices and also other funds. We invest in companies and sectors not well covered by other fund managers and brokers. This leads to returns that have lower correlation with the market compared with other domestic equities funds. For example, we screen out many of the typical constituents of an Australian equities fund (eg, BHP, CBA and Woolworths). The point is that our managed funds have ‘different’ returns to our peer group and the broader benchmark. This lower correlation may help reduce the overall risk within your clients’ portfolios.

Better diversification

The Australian Ethical Balanced Fund is a rarity in the crowded managed fund market: it is a true-to-label ethical fund with a diversified range of assets. It’s a potential option for mid-range clients who walk in your door and want to invest ethically in a broad range of asset classes. Along with positively and negatively screened fixed interest and equities (domestic and international), the fund provides exposure to unlisted property through its investments in the Dexus Healthcare Wholesale Property Fund and the Investa Commercial Property Fund. We are also a foundation investor in the Morrison & Co Growth Infrastructure Fund.

Reduced carbon risk

Australian Ethical’s managed funds will also help your clients mitigate the carbon risk in their portfolios. We are targeting net zero emissions across our funds by 2050, and the carbon intensity of our share investments compared to the benchmark was 66% in 2018. The target date of 2050 is set in line with the recommendations of the Australian Climate Change authority, but we will continue to work to move more quickly. We also use analytic tools from the European 2° Investing Initiative to analyse our managed funds. These tools showed our share investment in renewable power generation is proportionately about six times that of the global sharemarket.

Alignment with Sustainable Development Goals

One of the best measures of an ethical investment fund is its alignment with the UN’s 17 Sustainable Development Goals (SDGs).  The SDGs include taking action on climate change, reducing inequality, and responsible consumption and production. We estimate our sustainable impact as measured by the SDGs to be 3.4 times the sustainable impact of an equivalent investment in the overall sharemarket. Our sustainable impact for alternative energy is nine times the market, or $23,670 per $1 million invested, and our impact for the SDG goal of Quality Education is 12 times the market. Our alignment with the SDGs is the most tangible proof of our true-to-label ethical approach which we deliver to investors alongside strong risk-adjusted returns.

How ethical funds benefit client portfolios

This article provides general information only and does not take account of your individual investment objectives, financial situation or needs. Visit australianethical.com.au for our financial services guide and product disclosure statements for our superannuation and managed fund offerings. Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949).

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