Lonsec releases Australian and Global Equity Responsible Investment sector review

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Lonsec’s annual Review of Responsible Investment Funds covered seven Australian equity and three global equity funds. Lonsec awarded its premier ‘Highly Recommended’ rating to two Australian Equity Funds – BT Wholesale Ethical Share Fund and the ING Wholesale Sustainable Investment Australian Shares Trust.

Observations on the Responsible Investment Sector

While it was a fairly unremarkable year in terms of product development, there were a number of significant team movements impacting on the sector. ‘Offerings from AMP Capital, Australian Ethical and Challenger all experienced significant personnel change,’ said Steve Sweeney, Lonsec’s Senior Investment Analyst responsible for reviewing the sector.

The lack of new entrants highlights the Responsible Investment sector’s continuing adjustment to subdued post credit crunch appetite for equity products. “There are a few exceptions (e.g. emerging market funds) but generally this trend is consistent with product development across most equities categories as fund managers continue to consolidate product lines,” said Sweeney.

Sweeney also attributes the lack of new Responsible Investment product development in some part to the failure of last year’s UN Climate Change Summit in Copenhagen to produce a meaningful outcome on achieving global emission reduction targets.

“Responsible Investment proponents were hopeful that a positive agreement committing economies to material emissions reduction would significantly progress the climate change agenda boosting the sector with some positive regulatory developments for key industries and companies,” said Sweeney.

Despite the lack of product growth, Lonsec observed an increased integration of ESG (assessment of environment, social and governance practices) into the mainstream company research process.

Sweeney noted that this trend has not been exclusive to funds in the traditional ethical or SRI sector but across other sectors including Australian equities, global equities, Asian and emerging market funds.

Although this trend is blurring the lines between the Responsible Investment sector and mainstream equity funds, Sweeney commented that there still remains “considerable grounds of distinction between ethical and sustainable or ESG style funds, including philosophical approach, that are likely of material interest to investors in these funds”.

Lonsec noted that while the sector’s Australian equity peer universe is modest (7 funds) there has been a wide variance in performance for the past 12 months and that this highlights that it is not a ‘one size fits all’ investment approach.

‘It’s important to recognise the structure of these funds can have a significant performance impact either through restricting the investment universe (e.g. no exposure to resources) or introducing increased volatility compared to mainstream large cap Australian equity funds due to greater exposure to smaller companies” said Sweeney.

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 (“Lonsec”) and should be read before making any investment decision about the product(s). Disclosure at the date of publication: Lonsec receive a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. Lonsec’s fee is not linked to the rating outcome. Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

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