Benchmarking sustainable funds’ performance

This article is part of
Sustainable Investing - March 2014

Both funds have significantly outperformed their index and sector peer group. The Asia Pacific fund is the top-performing fund in the IA Asia Pacific ex Japan sector in both five and ten years, beating the flagship First State Asian equity fund, Angus Tulloch’s First State Asia Pacific Leaders.

The Global Emerging Markets Sustainability fund is not actually within the IA Global Emerging Markets sector, after being forced out recently due to not fulfilling the requirement to hold at least 80 per cent in companies listed in emerging markets. However, it has beaten every fund currently within the sector in the past five years.

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The team also runs a global equity fund, First State Worldwide Sustainability, but that has yet to generate the same level of outperformance as its two stable-mates since its launch in 2012.

The Sustainability funds are run with the express purpose of investing in companies contributing positively to the sustainable development of the countries in which they operate, whether through the environment, healthcare, “responsible finance” or infrastructure. These themes have been especially important in developing markets.

Thematic investing

Aside from funds investing to certain sustainable or ethical criteria, sustainable investment also encompasses funds investing in specific sustainable areas, such as water or agriculture, as well as alternative energy funds.

For investors looking to invest in sustainable energy funds, there are two major options: sustainable energy equities, for which there are several open-ended funds available; or investing directly in alternative energy infrastructure projects, for which there is burgeoning demand in the investment trust arena, with several new trusts having been launched in recent years.

Open-ended alternative or clean energy funds have yet to set the pulse racing in terms of performance, with all of them having suffered a torrid 2011, though they have delivered better returns in the past three years.

Pictet Clean Energy has been leading the pack recently, and Pictet as a fund house has a range of funds designed to cater for investors interested in sustainable investment, boasting water and agriculture funds as well as the Clean Energy fund.

However, when it comes to comparing performance between renewable energy investment trusts, things are trickier. Of the AIC sector for Infrastructure: Renewable Energy only one product has a three year track record – and that is a venture capital trust (VCT).

The purpose of the trusts is to deliver a high and inflation-linked income stream but, so early in their lifetimes, it is unclear which trusts can deliver best on that mandate and, as the sector is in its infancy, the trusts’ share prices are moving around somewhat independently of their net asset value (Nav) as investors try to pick the winner.

The best-performer until recently was Greencoat UK Wind, which investment trust broker Winterflood Securities surmised may be because it is one of the older trusts and had delivered on its promises so far.