SRI falls short of mainstream funds
Socially responsible investing (SRI) can deliver excellent returns but according to the latest Lonsec research, the jury is still out as to whether the sector’s performance will be consistently on par with that of mainstream funds.
As part of its review of the Australian and international equity SRI sectors, Lonsec discovered SRI funds fell just short of their more traditional counterparts in terms of average absolute returns.
Over the three-year period to December 2006, the average absolute return for the SRI funds Lonsec reviewed was 23.5 per cent per annum.
This compares to the 24.6 per cent per annum delivered by the average Lonsec-assessed large cap Australian equity manager over the same time period.
Lonsec investment analyst Silvo Glavan attributed SRI’s lower returns over this period to the current structure of the Australian market.
“If you look at the way our market is structured, approximately 25 per cent of it is represented by resources and resources related stocks, a sector which has delivered exceptional returns to investors over the last three years,” Glavan explained.
“As an outcome of their screening processes, the majority of SRI or ethical funds have either had an underweight or zero exposure to the resources sector.
“However, this does not suggest that SRI/ethical funds can’t outperform mainstream managers — in fact, if you undertook the same analysis prior to the resources boom, SRI/ethical funds on average outperformed their mainstream peers.”
Glavan believes that over the long-term, SRI will play a significant role in the mainstream market.
“Investor demand for corporations to take greater accountability for the impact their activities have on the environment is likely to be the driving force behind greater demands for SRI funds,” he said.
Glavan predicts as this trend grows there will be increasing pressure on mainstream managers to place greater emphasis on assessing the social and environmental impact of a company’s operations within their investment processes.
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