Top Equity Funds for Sustainable Returns

Good Money Week: Looking for sustainable long-term returns? Make ESG criteria a part of your investment decisions. We highlight equity funds which don't compromise for profits

Emma Wall 2 November, 2016 | 1:00PM
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Emma Wall: Hello, and welcome to the Morningstar series, 'Ask the Expert'. I'm Emma Wall and I'm joined today by Morningstar's senior fund analyst, Muna Abu-Habsa to talk about sustainable investing.

Hi, Muna.

Muna Abu-Habsa: Hi, Emma.

Wall: So this week is Good Money Week, which in the past has been the preserve of quite niche ethical investors. However, sustainable investing has really come to the fore recently and people are cottoning on to the fact that this type of investing really is for everybody.

Abu-Habsa: Yes. So, there's been a lot of exciting developments this year on sustainable investing, and it's quickly becoming part of the investment mainstream. So, if you look at to some of the numbers as of September this year, over a thousand asset managers had become signatories of the UN-Backed Principles for Responsible Investments. So they've actually committed to incorporating sustainability issues into their investment processes.

Wall: Here at Morningstar, we've actually introduced an ESG rating, haven't we, to help investors who believe in sustainability make informed investment decisions.

Abu-Habsa: Yes. So, I ran a few screens earlier actually on funds that have performed well on ESG. So, they've managed their ESG risks and opportunities better than most of their category peers, but funds that have also delivered strong risk-adjusted returns over the long-term for investors, and also, our Morningstar Medalists. So funds that have positive analyst ratings.

Wall: That seems to suggest that funds that have done well in the past but also funds which will outperform their peers in the future as well. Perhaps looking at European equities, we can start with that, who scores highly?

Abu-Habsa: So, within European equities, there are a number of options for investors there. If you look at Henderson Horizon Pan European Equity, now I'm not at all surprised that the fund scores well on sustainability. It has got a 4-globle sustainability rating. This very much derives from the fund manager's stock selection process, which has a strong focus on finding high-quality growth-oriented companies.

And by quality there, Tim Stevenson isn't only looking at a high return on equity or strong balance sheets, he's looking at quality across the board. Also, for that particular fund, actually, the manager hasn't owned any tobacco stocks for the last 10 years.

Wall: What about if we look close to home, within the U.K. equity fund space, which fund score highly across those screens?

Abu-Habsa: So on the same screens on U.K. equity funds, I get a Threadneedle heavy outcome. So, all of those Threadneedle funds combine favorable ESG scores, but also good controversy scores as well. So, they've managed to avoid some of the companies that are held by their peers, which have been exposed to serious controversies. Actually, it's worth mentioning that for Columbia Threadneedle, overall across their fund range, their funds have had scores that are above average.

Wall: Muna, thank you very much.

Abu-Habsa: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar