Socially conscious funds don’t suffer performance penalty – analysis


An analysis of global funds over more than a decade has found that there is no performance penalty for socially conscious products and even a slight positive skew over the period – despite a reputation to the contrary.

The Morningstar analysis for the period since 2002 ranks funds according to its star ratings, which are based on risk-adjusted performance over a period up to 10-years. The analysis is based on 25,000 observations.

While the fund universe is based on an even bell-curve distribution, the funds that self identify as socially conscious have more top-performing five-star ratings than worst-performing one-star and more four-star than two star ratings.

“It’s a slightly positive skew, but it’s also a steeper distribution,” says head of sustainability research Jon Hale.

The analysis is part of a wider paper that points out that the performance penalty associated with socially responsible funds from the 1990s has disappeared as the sector becomes more sophisticated.

Hale says the results could become more exaggerated as more funds switch to positive screening, which historically have been better at outperforming the general fund universe compared to negative screening.

Socially conscious funds vs fund universe – cumulative Morningstar ratings 2002-2016


Negative screening, whereby sin stocks are excluded, can act as a drag on performance because, in line with modern portfolio theory, it limits the investment universe on a largely non-financial basis creating a less efficient portfolio.

Hale says: “If you go back to the early 2000s, exclusion was kind of the only way you could do this, because the data and information on one company’s sustainability policies compared to their peers was at a very early stage.

“The data on company-level ESG has gotten to the point where now it makes sense. It’s usable for managers to incorporate it.”

The funds studied were largely in the equity sector, according to Hale, but also included fixed income and allocation funds. He says the trends appeared to be the same across sectors.

Chelsea Financial Services ethical analyst Ryan Lightfoot-Brown says investor feedback is prompting funds to up their game when it comes to ESG factors.

Lightfoot-Brown says funds that are “good” when it comes to environmental, social and governance factors are most likely to survive, especially as these become increasingly important to customers and stakeholders.

Furthermore, better corporate governance means they are unlikely to suffer from environmental, social or business disasters that consume resources and cause short-term falls in the share price, therefore freeing up cash to pay shareholders or improve the business.

Lightfoot-Brown says the Rathbone Ethical Bond fund invests in quality investment grade bonds and has a higher income target than most of its peers.

This is despite the fact it does not invest in around one third of the index due to its rejection of mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco companies.

The fund, managed by Bryn Jones, has returned -1.3 per cent in the last three months compared to -2.6 per cent for the IA Sterling Corporate Bond sector, according to FE data. Over a three year period it has returned 19.8 per cent compared to 17.4 per cent in the sector.

Lightfoot-Brown also likes the EdenTree Amity UK and Standard Life Investments UK Ethical funds.