By all accounts, ethical or SRI investing hasn’t taken off as rapidly as some had expected. A Super Review survey of super funds offering these options found that almost half describe member uptake as poor. And because most of these options are equity funds, the performance of many of these options has been disappointing in recent years.
Indeed, while there was a rush of fund managers and super funds offering SRI in 2001 and 2002, this appears to have dried up.
One fund manager to enter this market recently — and possibly the only one — is Ausbil Dexia. Its director of global products Michael Wilson says: “From talking to people in the market, I can only conclude that while there was a lot of talk about SRI about two years ago, the general expression of putting money in is very low. Most of these options have really sat there dormant without much happening… There’s generally a negative feeling about SRIs coming through.”
Wilson believes that part of this stems from a University of Melbourne report, released in June 2002, which revealed a 0.7 per cent per year loss from SRIs compared to mainstream investments, based on the analysis of seven-year returns. The survey’s results were derived by leaving out shares from those industries usually screened out by SRI funds, such as alcohol, armaments, gaming, pornography and tobacco.
Wilson adds that most super fund members “probably don’t understand enough about SRIs, and when they did their homework, they probably picked up a negative view of what returns would look like”.
James Thier, an executive director of Australian Ethical Investments (AEI), notes: “Most members are in the default option anyway. Its hard for people to make decisions and super funds often have many choices. The ethical option is just one of a number of options and will only appeal to a particular niche of people.”
Thier also believes that some super funds aren’t providing the SRI options that members want. “Ethical investors are much more discerning about what their money is doing,” he says. “They will respond when they see money going into investments that are, in their view, not appropriate.”
Some may believe that the few negative screens applied by the option are not enough while others may find the best-of-breed concept problematic because it invests in areas they oppose, says Thier.
For example, many investors are against genetically modified food products and the companies that sell them. Yet, some best-of-breed funds include these in their portfolio.
Thier says: “If members don’t want to invest in forest logging, then they won’t want to invest in the one that does forest logging best… Super funds need to choose their SRI fund very carefully and then they need to educate members on what it’s all about.
“They also need to show members that they don’t have to sacrifice returns if they take the SRI option. Returns are important to members. They want a return close to what they will get in the market place, but a lot of the newer funds have not performed in a way that shows they can get this.”
Nonetheless, the results from various managers, including AEI, Ausbil Dexia and Suncorp, have demonstrated that returns don’t have to be compromised by SRI investing.
Justine Hickey, manager of equities at Suncorp Investments, says various studies have found no significant differences between the financial performance of ethical funds and that of traditional investments.
But, she cautions, SRI risk levels may be slightly higher. This is because a reduced universe of stocks due to screening lowers the fund’s ability to diversify risk.
Wilson, who also points to studies showing the positive links between SRI and financial performance (see table above), cautions that any SRI exposure has to have the risks managed and biases neutralised. “SRIs tend to perform better in a bull market and weaker in a bear market. They are also biased towards growth stocks and small caps.”
But Wilson adds: “While it is hard to put in concrete, it appears the reason why SRI companies perform well is because their management are more focused on the reputation of their companies. They are more focused on the appeal of their companies to the broader community, staff and everyone that they deal with. They aren’t just focused on one or two years of cost cutting.”
According to Hickey, ethical fund investments represented around 0.24 per cent of managed funds in 2002 in Australia. However, in the US, 12.5 per cent of the money invested goes to ethically screened managed funds.
Both Thier and Wilson believe the SRI uptake will expand as people become more educated and if SRIs can show competitive returns.
Wilson says SRI will grow “once asset consultants and retail researchers realise that they can get the same risk/return profile found elsewhere, and at the same time, have an exposure that has social or ethical standards, so that they can sleep at night”.
Right now, however, Wilson is plugging Ausbil Dexia’s global SRI offering as a good mix with the rest of a super fund’s international exposure, because of its extremely strong performance against the MSCI World Index.
