Three Tips for Building a Sustainable Fund Portfolio

May 24, 2018

What to do you need to know in order to build and manage a sustainable portfolio of funds? That was the topic of our May 2018 webinar on sustainable investing.

In the webinar, FundX President Janet Brown talked with Morningstar’s Tanya Svidler, director of ESG solutions, and Avani Rau, portfolio manager of sustainable strategies at FundX.

Here are three of Tanya and Avani’s tips that can make it easier for you to build a sustainably focused portfolio.

Tip #1 – Start with a solid investment strategy.

These days, investors have more information on sustainability measures than ever before, but you’ll want to incorporate this data into an existing strategy.

Morningstar’s ratings are “designed to be a complement” to your investment process, Morningstar’s Tanya Svidler noted.

That’s what we’ve done at FundX: “We already have a system in place for fund selection,” Avani Rau said, and we’ve integrated Morningstar’s sustainability scores into this process.

“Sustainability ratings are portfolio based, not performance based,” Avani explained. In our strategy, “we first screen funds by performance, and then we look at sustainability.”

Tip #2 – Sustainability ratings can enhance your process; they don’t replace it.

New sustainability fund ratings can help investors identify funds that invest in companies with strong environmental, social and governance (ESG) practices. Ratings can also help you find funds that invest in a sustainable way even if they don’t label themselves as such.

However, sustainability ratings are “just one of the factors investors need to look at,” Morningstar’s Tanya Svidler said. For instance, some investors want to screen out certain companies or engage with companies to help them improve.

FundX’s Avani Rau agreed: “Data is important, but it isn’t enough,” she said.

“Morningstar data gives us a quick lay of the land for each fund in terms of sustainability of underlying holdings for the portfolio,” Avani said.

Before Avani takes a position in a fund, however, she does some additional due diligence, including reviewing a fund’s approach and holdings and talking directly with fund managers.

“This may not be something individual investors do, but it’s something I believe advisors have a responsibility to do for their clients,” Avani said.

Tip #3 – Sustainability is one aspect of mitigating risk.

Morningstar’s environmental, social and governance (ESG) data aims to “identify the players doing the best job at managing long-term risks,” Morningstar’s Tanya Svidler said.

You’ll also want to consider the risk of the funds you’re investing in, FundX’s Avani Rau pointed out. Investing primarily sector funds can be a mistake. “These funds can be very volatile, and that makes them challenging to own long term,” Avani said.

Instead, Avani suggests that investors “primarily target diversified stock funds that tend to have market-level risk.”

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pri May 31, 2018 at 6:31 am

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