It's sustainability week at Morningstar and that's a good opportunity to revisit our popular story last year profiling the top-rated sustainable funds available to UK investors. We also ran the screen in 2021 so it's useful to see how the list has changed as ESG investing has evolved. Still, some fund names and asset manager make regular appearances.
Here's how we did it.
We screened the funds with a Morningstar Sustainability Rating and narrowed those down to those with 4 and 5 Globes, which means they are rated as Above Average or High on ESG issues. Last year we ran the same screen. These funds must also have a Morningstar Medalist Rating of Bronze and above, so that will capture our highest-rated funds of Bronze, Silver and Gold. Looking at funds for sale in the UK brings up 249 funds. That drops dramatically when we look at Silver and Gold-rated funds and (121), even more if we only screen for funds with 5 Globes. There are only 14 funds with the highest Sustainability and Medalist Ratings.
So we've looked at this from a return and ratings lens. For consistency, last year we used year-to-date return and five-year return (annualised). Ideally we'd look at 10-year return but in many cases that’s not feasible – many of the funds with high sustainability rating are relatively new – so five years is the next best thing.
Handily there are six funds which can boast double digit five-year returns, three of which have Gold ratings, L&G Global Technology Index and Stewart Investors Indian Subcontinent Sustainability – which topped the list last year – and FSSA Indian Subcontinent All-Cap. Year-to-date returns are decent too and that’s function of tech and Indian stocks continuing to outperform global benchmarks.
What's interesting is the best-performing funds have a much higher five-year return record than last year. The range is between 10% and 18% on an annualised basis whereas last year this was between 8% and 12%. Some of that uplift can be considered in the context of 2023’s higher markets but other factors will be at work; so we suggest checking the fund factsheets for performance, what these funds invest in, where they invest.
Looking at the first table, investors may not consider either tech or emerging markets funds in the sustainability universe but many different products can meet the criteria.
We've created two tables, one showing the top five funds with 5 Globes that have the highest 5-year total annualised return, and the other table focuses on Gold-rated funds only.
We've already met three of these top performers, but beyond the top three it's a diverse cohort, with a number of global equity large cap funds, and also two aggressive allocation funds, a healthcare fund and even a UK equity large cap.
Morningstar ratings never stand still so this year we are able to incorporate even more strict metrics in the fund selection process. Our globe rating system remains a key pillar of scrutiny of sustainable funds. But we've recently added "Sustainability Themed Investments", as this article explains.
These strategies explicitly target exposure to one or more sustainability themes, and we have categorised these as Climate Action, Healthy Ecosystems, Basic Needs, Resource Security and Human Development.
