Ethical funds performance a mystery
THERE is evidence that socially responsible funds outperform, however there are questions over what actually delivers the extra returns, according to Institute of Actuaries immediate past president David Knox.
Knox presented the initial findings of a research project into socially responsible investment (SRI) fund performance at the Ethical Investment Conference in Melbourne last week.
Analysis of an SRI fund that had a track record of more than three years showed it outperformed its benchmark by 1.6 per cent annually.
The fund used a negative screen, that is, it was prohibited from investing in various industries, plus it had a management screen.
Knox says it is hard to know what delivered the outperformance. He says it could be the ethical or management screen or it could have been that the manager was a good stock picker.
Van Eyk associate director Rashmi Mehrotra echoed Knox’s view. She says that SRI funds can deliver outperformance, but the reasons for this are not absolutely clear from a researcher’s perspective.
Knox told the conference that the growing demand for SRI funds may push share prices up in the short term.
He says that 10 years ago there was a limited amount of SRI factor built into shares. Nowadays there is a better understanding of SRI and that is partially factored in.
Currently, SRI stocks are possibly undervalued until all their “goodness” is included in the share price.
“As soon as any undervaluation is factored in, outperformance will end investing in SRI, and will actually cost investors in financial terms,” Knox says.
He says that SRI funds will suffer because their investment universe is smaller than a typical share fund. Consequently they will miss out on some returns and their volatility will be higher.
Knox says while SRI investors may suffer financially, there is still the feel-good factor.
“The dissatisfaction from lower investment returns over the longer term may well be offset by the satisfaction from the feel-good factor associated with SRI.”
Recommended for you
AMP has agreed in principle to settle an advice and insurance class action that commenced in 2020 related to historic commission payment activity.
Financial advisers will have to pay around $10.4 million of the impending $47.3 million CSLR special levy but Treasury has expanded the remit to also include super fund trustees and other retail-facing sub-sectors.
While social media can have positive financial influence, the overwhelming risks signal a greater need for affordable advice as Australians continue to seek financial education on social media.
Fitzpatricks Advice Partners has released a guide on building a national advice firm with the argument that these firms are crucial to facilitating growth in the struggling profession.
