As with any active fund, the investment team, their experience and expertise is going to be a big driver of performance for SRI funds.
All funds have objectives and remits that dictate where they invest and which stocks they select, but SRI funds have an additional set of parameters known as their ‘SRI policy’, explains Julia Dreblow, founder of sriServices.
“Relative performance is therefore linked to the degree to which the combination of these deviate from whichever ‘mainstream’ benchmark an adviser may be considering.”
For example, as the UK is unusually dominated by big multi-national miners and oil companies, the SRI UK equity funds which avoid these companies suffer a bias that can lead to excess relative volatility in periods when oil and miners rally.
But this is peculiar to the UK market and SRI equity funds investing in Europe and global stock markets do not have this bias, points out Mike Appleby, investment manager at Alliance Trust’s SRI Team. “Some geographical diversification out of the UK will offset this considerably.”
He argues that while exclusion criteria for negatively-screened funds can have some shorter-term impacts on performance, over time these screens should work in the funds favour and be a positive impact on performance.
“I believe that being able to understand sustainability themes and apply them to what stocks are worth is an emerging and rare skill and will help SRI funds that use this approach to outperform the broader market,” he says.
The way other SRI styles work can also be loosely predicted, says Ms Dreblow, as follows:
• Balanced ethical funds tend to invest in most sectors but typically select only the companies that best fit their ethical screening policies.
• Sustainability-themed funds tend to focus on the most forward-looking companies that understand sustainability-related business challenges and opportunities.
• Environmentally-themed funds tend to focus on the most attractive companies that have the strongest green credentials, which will benefit as environmental issues becoming increasingly important to business. Legislature can affect these.
• Clean technology fund performance is largely driven by the success or otherwise of the often quite narrow remit of the fund. Some are quite broad, whereas others are very specific and may even focus on a single area such as the solar industry.
• Responsible engagement options are mainstream, unscreened investments, such as regular UK or Global Equity funds. As engagement applies to stocks that are already held rather than ‘buy/sell’ decisions no performance variation is normally observed.