SRI funds underperformed European equity funds over past three years -Fitch

Investors should carefully weigh the quality of socially responsible investment (SRI) investment processes, notably reactivity, focus on strategic stock research and active risk management, Fitch Ratings warned today.

SRI funds have been a popular segment in the past five years. According to data quoted by Fitch, currently 7.5% of the 1,900 European equity funds identified claim to follow an SRI approach.

SRI is newer in bond funds, at 5% of the 1,200 European bond fund universe. SRI assets under management reached €121bn in Europe at the end of April, across 1,071 funds, mostly distributed in France, UK and Switzerland.

“Yet, SRI is no protection to poor or average investment processes and SRI in itself has not improved the average risk/return profile of a European equity fund in the recent past. Even on a longer term basis, including 2008, downside protection is not statistically proven. By contrast, European SRI bond funds have delivered better returns with lower risk in the past three years,” Fitch said.

While having similar total expense ratios (TER), SRI funds have on average underperformed non-SRI funds by 0.6% annually over the past three years in the European and eurozone equity Lipper categories.

“Market participants often view SRI as a lower risk and more defensive stock picking strategy. This has not been confirmed in the past three years as SRI funds have exhibited slightly higher volatility and drawdown, respectively 19.5% and -23.2%, vs. 18.8% and -21.7% for non-SRI funds,” Fitch said, acknowledging that investors who adopt SRI also consider non-performance related benefits, such as carbon footprint or social impact of their investments.

Conversely, SRI filters have statistically added value in euro bond fund categories (excluding pure corporate funds), with 0.2% annualised outperformance and lower volatility and drawdowns for SRI funds relative to non SRI vehicles.

“When applied to bond funds, SRI criteria reinforce fundamental biases and have resulted in greater deviation relative to debt-weighted indices, notably on peripheral sovereign and bank debt. At the frontier with SRI, Fitch sees growing investors’ interest for fundamental approaches to bond fund management, away from conventional debt-weighted indices,” Fitch said.

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