How Undiscovered Sustainable Funds Are Changing The Game

October 17, 2016

fb-undiscoveredsriMost investors today want funds that seek out companies that support clean air and water, produce safe products, and are well managed.

But with more than 25,000 funds available today, how can you find funds that are trying to do the right thing?

We’ve been managing portfolios of sustainable funds for decades, and now there are far more funds to choose from.

These funds tend to fall into two distinct groups:

1. The Usual Suspects: Sustainable or Socially Responsible Investing (SRI) Funds

The first group are self-professed sustainable responsible impact or socially responsible investing (SRI) funds. These funds are easy to spot because they often have “sustainable” or “responsible” in their name.

Many of these funds have been around a long time, and they take a comprehensive approach to sustainable investing. They have a mandate to invest in companies that have strong environmental policies, social programs and corporate governance practices (this is known as ESG), and most of these funds also avoid investing in objectionable companies or industries, like tobacco.

Many SRI funds also actively engage with companies, using their power as shareholders to file shareholder resolutions, vote proxies and meet with company management in an attempt to change a company for the better.

Where to find SRI funds?

You can find lists of self-professed SRI funds online, like this one from the The Forum for Sustainable and Responsible Investment (USSIF), but they often include load funds; funds that are only open to institutional investors; and funds that don’t have sufficient assets. Online lists can be a good starting point, but you’ll need to do some additional work to determine which of these funds are actually worth owning.

We’ve been covering SRI funds in NoLoad FundX for many years, and we screen SRI funds to make sure the funds we cover are noload, available to retail investors, and well established.

2. The New World of Undiscovered SRI funds

Now, you no longer have to limit your portfolio to self-professed SRI funds. New tools have identified a number of previously undiscovered SRI funds. These funds invest in companies with good environmental, social and governance (ESG) policies, but the funds aren’t required to seek out companies that are trying to make a positive impact. They’ve usually bought these companies for other reasons—perhaps the stock has good growth characteristics, or the fund manager believes the stock is trading at a discount.

Undiscovered SRI funds could improve your results. In October 2016, Barron’s looked at the performance of 200 sustainable funds (including both self-professed and undiscovered SRI funds) and found that 50 of these funds beat the market over the past year, but just one of the 50 funds was a self-professed sustainable fund; the others were all all undiscovered.

Where to find undiscovered SRI funds?

It used to be nearly impossible to identify these hidden SRI funds, but new sustainability ratings are making it easier. Morningstar introduced sustainability ratings for funds in 2016 (Barron’s used these ratings in its study of sustainable fund performance), and MSCI also offers sustainability ratings.

Ratings give investors many more funds to choose from, and this can make it easier to diversify your portfolios and adapt to changing markets.

But a fund’s sustainability ratings will change over time, so you will need to monitor your funds to make sure they’re up to your standards.

Which funds are right for you?

Should you invest in self-professed or undiscovered SRI funds? If you’re only focused on one particular issue, like the environment, you’ll likely need to limit yourself to self-professed funds. But you may be able to make a bigger impact by considering a mix of self-professed and undiscovered SRI funds and investing in those that have the best recent returns.

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extra5 October 17, 2016 at 6:17 pm

I looked up one of the funds in the Barron’s list, Fidelity Growth & Income Portfolio (FGRIX). I noticed that the fund holds Monsanto, which doesn’t fit my profile of a SRI fund holding. It was rated with 4 globes on MorningStar. This makes me wonder about the validity and criteria for their ratings.

Avani Desai October 26, 2016 at 1:07 pm

Hello extra5,

To understand the validity of the “Globes” or scores depending on the rating provider, it’s necessary to dig into the methodology by which they arrive at these overall Globes or scores. These ESG quantifying measures do not automatically give bad/low score to a fund based on one or two holdings. So while some companies (like MON or perhaps CVX in case of FGRIX) might and probably do bring down the overall score of the fund, they are likely rewarded for holding certain names that rank high from an ESG perspective raising their overall score. Since a lot of the funds don’t explicitly incorporate ESG factors into their stock-picking, it is important to remember that overall scores are calculated based on ESG score of individual stocks as well as their weight in the portfolio. The alternative is to go with self professed SRI/ESG focused funds that explicitly state the type of businesses they exclude from their portfolio.

I hope this helps.


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