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December 22, 2014

Monday Morning Memo: Socially Responsible Investing–Good Intentions and Cash Flow

by Jake Moeller.

Lipper’s Jake Moeller reviews the Investment Week Sustainable Investment Conference 2014 on November 26, 2014 and examines cash flows into ethical funds.

Reuters/ Mike Segar

Reuters/ Mike Segar

For anybody looking for a feel-good boost heading into the festive season, attending a conference on socially responsible investing (SRI) should definitely be considered. The recent Investment Week Sustainable Investment Conference in London contained a general spirit of goodwill and altruism that permeated a full house of very committed and merely interested delegates alike.

For many investors SRI investing, or “ethical” investing as it is still generically known, sits on the periphery of their investment decision-making tree. But for an increasing number of investors and advisors it is a full-time commitment. Keynote speaker Chris Welsford , Managing Director and founder of Ayres Punchard, is a committed SRI IFA who has built a business with around 70% of its model portfolios flowing into ethical funds.

Fund managers too are increasingly showing willingness to not merely offer cursorily screened ethical funds but to create SRI committees that proactively monitor ethical screens, formulate charters, and coordinate shareholder engagement. F&C has been involved in ethical investments since 1984 and is well known for its former “Stewardship” range of funds. Famed fund manager Audrey Ryan, head of Kames Ethical Equity Fund, has produced top-quartile returns over extended periods with a “dark-green” screen (thus dispelling the myth that screened funds are in some way “suboptimal”). Fund groups such as Pictet and Alliance Trust also have ethical offerings with good performance.

Chris Welsford, Managing Director, Ayres Punchard Investment Management Limited. With permission.

Chris Welsford,
Managing Director,
Ayres Punchard. With permission.

SRI is by no means a homogenous classification; green screens, religious screens, sustainability screens (to name a few) mean that it’s difficult to establish a definitive list of what is socially responsible. Add in shareholder engagement which itself is not a pure form of ethical investing (Chris Welsford points out that engagement can sometimes crowd out the benefits of local activism), and identifying funds within this spectrum becomes imprecise. As I highlighted in a recent Fund Manager Briefing, Hermes Investment Management for example, has a very proactive engagement division providing input into all of its funds without claiming ethical status on every one.

The Lipper database flags for “ethical” funds on the advice of the fund manager or where a SRI objective is clearly stated in the fund objective. As at November 2014, within over some 2,500 funds in the IMA sector classifications in the U.K for example, only 61 funds (2.4% of all funds) are listed as ethical. In terms of total assets under management, this constitutes only approximately 1% of all managed assets (as at November 2014).

Examining broader European Lipper FundFile data reveals slightly higher sales flows. In the calendar year 2014 (to end of September) 7.8%, 8.1%, and 6.0% of bond, equity and mixed-assets respectively flowed into socially responsible flagged funds. There is also evidence that ethical fund flows are more resilient (“sticky”) in poor markets. In 2012 European equity funds saw nearly €6bn of sales outflows overall but ethically flagged funds saw a small inflow (€250m) over the same period. Similarly, in 2011, €12bn was redeemed from European bond funds overall while those with ethical flags actually saw net inflows of €1bn.

Ostensibly, flows into ethical funds constitute a small percentage of fund flows overall, and—although many investors purport to consider ethical concerns in their investment decision-making process—the reality is the money goes elsewhere. However, there can be no doubt there are compelling reasons to consider SRIs. Fund managers themselves are taking the issue very seriously, and it is likely that in the near future an increasing amount of investors will have some exposure to SRIs, perhaps without even realising it.

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