Slim pickings for SRI investors, funds data suggests

More ethical funds have been launched into the market in recent years. But data suggests investors need to choose wisely.

Both equity and bond funds targeting ethical investors have been able to provide positive returns over a three-year period to 12 August.

But it is also the case that these funds have provided a broad spectrum of returns – not always to the benefit of the investor.

Equity funds

There are many Nordic-based products among the better-performing ethical equity funds – as defined by gross returns rebased in euros.

This is unsurprising, perhaps, in light of the strong performance of local currency against the euro over the period, particularly in the past year when the Swedish krona and Norwegian krone have been driven higher by eurozone debt problems.

But it may also reflect the fact that SRI/ESG (environmental, social, ­governance) investments have been at the core of pensions and other institutional portfolios for much longer in the region than in other European markets.

The Banco Kultur (up 28%), Banco Svensk Miljo (up 12.5%) and Swedbank Robur Folksam Forvaltningsfond (up 11%) are all Sweden domiciled and their returns over the period put them among the top ­performers according to FE data.

However, the spectrum of ­performances is wide in the equities space. The Financiere Performance ­Environnement fund, returned -53.5% over the period.

The Dexia Equities L Sustainable Green Planet returned -53% and the Rothschild Edmond de Rothschild Ecosphere returned -49%.

Yet these lower performances did not come with lower ­volatility. The Financier Performance ­Environnement fund carried risk of about 24% in the 36 months to the end of July, Financial Express data suggests.

That is not much better than the 27% of the Banco Kultur, ­considering the difference in return of more than 80% between them.

Bond funds

Given how this asset class has ­performed relatively speaking in the past three years, returns from ethical bond funds are generally positive.

Many offer double digit returns over the period. Among the better performers are Swedbank Robur Ethica Ranta (up 20% to 12 August), Kepler Ethik Renten (up 18%), and Schelhammer & Schattera Superior 1 Ethik Renten (up 17%).

Each has taken a distinctly different approach to fixed income assets, despite acting under the broader ethical umbrella.

Swedbank Robur’s fund is ­dominated by Nordic corporate and Swedish government bonds.

Kepler’s top ten holdings are ­dominated by government bonds issued by Austria, Germany and the Netherlands.

The Schelhammer & Schattera fund is heavily invested in bonds issued by banks, including those that have had to be bailed out by European taxpayer, such as Lloyds in the UK – incidentally its biggest single holding accounting for 5.62% of the portfolio as of the end of July.

At the other end of the ­performance spectrum, funds such as the Raiff Salzburg Oppenheim Ethik Bond Opportunities, which returned -6% over the period, invested chiefly in a mix of financial and government bonds.

Equity funds with ethical mandates face a challenge finding the right risk/reward profile, with some such funds offering poor returns with high risk.

A more straightforward ­comparison exists between the better performing ethical bond and equity funds.

The data suggests those looking for higher risk/reward may feel comfortable with the likes of Banco Kultur.

But, against far lower risk without loosing too much performance, the likes of Schelhammer & ­Schattera Superior 1 Ethik Renten stand out.

They may offer about half the ­performance of an equity fund, but the volatility is reduced by ­considerably more than that.

In conclusion, there are a number of products available to European fund investors that can meet requirements to beat inflation as well as meet ethical mandates.

But investors need to also be aware that this is not always the case, and so far the full universe of ethical equity and bond funds remains small ­relative to the overall number of funds available.  

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