With so many funds to choose from, it can be difficult to find an ESG fund that matches your world view and also delivers strong returns. We look at three open-ended funds, each with a sustainable investing focus, which are rated by Morningstar analysts:
For Fixed Income Investors: Royal London Ethical Bond
The Bronze-rated Royal London Ethical Bond fund takes a fairly traditional approach to choosing corporate bonds to invest in, excluding any debt issued by any companies that fail its ethical criteria. This means the firm won’t invest in the bonds of firms which get more than 10% of their revenue from areas such as alcohol, arms, gambling and tobacco. However, it is worth pointing out, that unlike many sustainable funds there are no aspects of positive screening in the process, whereby funds seek out companies making a positive impact.
While the fund predominantly backs investment-grade bonds it does also consider unrated debt (bonds which are smaller issue sizes, sub-investment grade, or non-sterling). Although this is typically limited to around 15-20% of the portfolio, these bonds can be more illiquid and as a result and this limits the fund’s rating to a Bronze, says Morningstar analyst Louise Babin.
The fund, run by Eric Holt since 2009, is heavily diversified with around 300 to 400 holdings and even the largest position, a bond issued by Electricite de France, accounts for less than 1% of assets. Other top holdings include bonds issued by insurance giants Prudential and Aviva, as well as the debt of Derbyshire Healthcare NHS Trust and property management company Places for People.
The fund has produced annualised returns of 5.59% over five years and is up 2.52% year to date, with a yield of 3.08%. Babin adds: “Performance over Holt’s tenure has been strong, ahead of the index and its category. That’s encouraging as it shows the fund’s ethical exclusions have not caused it to miss out on a significant portion of index’s performance.”
Investing in the Energy Transition: RobecoSAM Smart Energy
Energy is a major theme for many ESG investors, whether they are interested in improving efficiency, offshore wind farms or technology solutions that can improve our lives. The Bronze-rated RobecoSAM Smart Energy fund is looking for the innovators leading the way in the global energy revolution, benefiting from the transition to new ways of producing, distributing and managing energy.
Morningstar analyst Ronald van Genderen rates the fund’s experienced manager, in-depth knowledge and flexible approach. He says: “The execution of both trend and stock selection has been solid.” The fund’s team, led by Thiemo Lang, is not afraid to deviate from the benchmark; in fact, the portfolio contains only three of the 28 names in the S&P Global Clean Energy Index. Surprisingly, perhaps, for an energy fund, it has little exposure to utilities stocks and is instead highly skewed towards technology, which account for almost two-thirds of assets.
The ongoing charge is toppy at 1.85% but performance has been impressive, and the fund has delivered annualised returns of 15.7% over five years, and is up 12% year to date. Around half of the portfolio, which contains around 240 names, is in US firms including telecoms equipment firm Lumentum and semiconductor chip maker Qorvo. Van Genderen acknowledges that the fund scores poorly on pricing, ranking in the second-costliest quintile of its category, but adds: “We still think it will be able to overcome its high fees and deliver positive returns relative to its category.”
For a Thematic Approach: Impax Global Equity Opportunities
Impax Global Equity Opportunities is a fairly new fund, having launched in 2015, but its well-structured and disciplined investment strategy has earned it a Bronze rating with Morningstar analysts.
The fund has a global remit and as investment house Impax is known for its thematic and environmental approach to investing, the fund’s strategy also reflects this. Van Genderen says the fund’s strategy gives it an edge over its peers: “It largely uses the same process as other Impax investment trusts, which we know well. The approach targets firms with sustainable competitive advantages that can profit from a transition to a more sustainable economy.”
The Impax fund differs to the two funds previously mentioned in this article with a fairly concentrated portfolio of around 35 to 45 holdings, and a skew towards small and mid-cap stocks with a focus on stable, profitable businesses. Almost half of the portfolio is in US stocks, with other investments across Europe, the UK and Asia. Top holdings feature well-known names such as Mastercard, Microsoft and Taiwan Semiconductor, alongside the likes of engineering group Linde and Ecolab, a leader in water and hygiene solutions for the healthcare and hospitality markets. When potential investments have been identified by the team they are then analysed using a 10-step process which looks at aspects such as management quality, regulations and risks.
Up 4.84% year to date, the fund has delivered annualised returns of 13.9% over five years. Van Genderen adds: “From its inception in 1998, UK-listed boutique Impax has been dedicated to sustainable investing and assets under management have grown steadily, with all managers investing in their respective strategies.”
