Are SRI funds thematic ?
Should socially responsible investment funds be considered as thematic or not ? As the SRI’s vocabulary broadens similarly to the trend itself, confusion can sometimes be made between SRI, ESG and sustainable themes.
Ahead of the Cop21, Helena Viñes Fiestas (pictured), head of Sustainability Research at BNP Paribas IP and Edmond Schaff, head of Fund Selection and Asset Allocation at Cedrus AM give their views.
Within the SRI bucket, Schaff says he clearly makes a distinction between funds applying ESG criteria, whose investment philosophy relies on an SRI filter through the analysis of issuers’ ESG practices, and thematic funds that restrict their universe to a few sectors from which the sustainable development trend benefits such as renewable energies, energy efficiency or water.
For BNPP IP’s Viñes Fiestas, “in an ideal world, the bulk of mainstream funds would be what we call today “best-in-class” funds.”
“But there will always remain a bunch of SRI funds which will either respond to clients’ special requirements like Shariah funds or always go at the forefront of the market, focusing on themes that are not mainstream as yet,” she adds.
Cedrus’ head of Fund Selection underlines that from a financial perspective, funds applying ESG criteria can be compared to traditional funds investing in the same asset class because their management processes and their risk return profiles are very similar.
“Their goal is usually to outperform a non-SRI benchmark that is in line with their investment universe,” he explains.
Schaff says several management styles can be found in ESG compliant funds but he stresses quality growth management remain the most used by fund managers because they consider this style as “naturally compliant” with SRI whereas value management is under-represented.
As for thematic funds, Schaff points out similarities with sectorial funds in terms of risk return profiles.
“It is hard to assess the added value of thematic funds managers since no pertinent index has been launched yet on themes like water or renewable energies. The performance gap vis-à-vis large indices such as the MSCI World mainly dwells in the beta of the theme rather than in alpha being generated,” he says.
Cedrus AM has therefore developed a range of 12 internal indices aiming to assess the added value of thematic fund managers.
Institutional / Retail
Schaff assesses that SRI products, in particular best in class funds, are tailored for institutional clients’ investment philosophy focusing on the financing of the economy and a limited track-error compared to indices.
“But retail clients often find difficult to understand those products as they do not correspond to what they think an SRI fund is. They do not expect stocks from petroleum companies and banking groups involved in economic scandals to be picked in the fund because these ones are less “irresponsible” than their peers. SRI therefore struggles to attract retail clients,” Schaff observes.
He believes the development of thematic funds exposed to trends such as the financing of the energy transition, applying stronger sectorial exclusions may better draw retail clients.
So does Viñes Fiestas for whom thematic funds have “a particular resonance on the retail market since individual investors can really understand their strategies.”
“Ever more thematic sustainable funds will be launched that will pick up emerging technologies that respond to social or environmental challenges,” she foresees.