Lonsec has provided research coverage on the SRI and emerging markets sectors for a number of years, and the increased focus recognises the growth in ESG as an investment approach and the growing recognition of ESG factors as a source of alpha in investment management.

Lonsec Research’s Steve Sweeney will drive the new research focus as General Manager – ESG/SRI and Emerging Markets Research.

“By formalising and expanding our ESG and emerging markets research capabilities, we are recognising the growing importance of these sectors, both in terms of financial product expansion and the impact they are having within the investment community,” said Lonsec Research CEO Matt Olsen.

“We believe emerging markets research will be a key long-term growth area in financial product issuance, and it fits well with ESG given that governance remains a key risk area in many developing economies. Steve has made a very substantial contribution to Lonsec Research over many years, and his experience and expertise will add real value to this sector.”

Lonsec Research has noted increasing choice within the SRI sector over recent years, with fund managers adding more financial product options and incorporating ESG factors into their investment process across all mainstream asset classes in funds management.

“Socially responsible investing is often categorised as a modest sector, but we have witnessed sustained growth over the past decade,” said Mr Sweeney. “The sector has evolved from a standpoint of avoiding investment in unattractive companies on the basis of values, to embracing sustainability where investors can capitalise on the benefits of ESG analysis to enhance risk awareness and improve performance outcomes.

“There is greater awareness of the impact companies can have on the community and environment, especially among younger investors. As this demographic continues to build wealth, we expect to see more demand for investment options aligned with these values. Our job is to ensure that financial advisers are equipped to meet the investment objectives of their clients, including the identification of high-quality responsible investment products.”

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Steve Sweeney, Senior Investment Analyst responsible for this sector commented, “This growth reflects a combination of continued product development for retail investors in this category and a desire to increase product choice in a growth sector for advisers.”

Only two funds were awarded Lonsec’s Highly Recommended rating – the Aberdeen Emerging Opportunities Fund and the T Rowe Price Asia Ex-Japan Equity Fund.

It’s not just advisers and their clients showing greater interest in global emerging markets.

“In recent reviews of traditional developed global equities large cap managers, we have seen an increased exposure to developing economies,” explained Sweeney.

“We have also noted a modest increase in the number of funds using the MSCI All Country World Index over the MSCI World Index as the fund’s benchmark.”

“This trend is natural as global managers look to gain exposure to growing companies in markets with forward momentum.”

Lonsec believes that specialist emerging market managers with dedicated resources and tailored investment approaches may deliver superior outcomes in emerging markets versus those global equity managers primarily centred on traditional developed markets.

“Lonsec’s higher rated managers will tend to be singularly focused on this asset class, with dedicated resources on the ground and frequent company visitation programs as opposed to a bolt on approach to another strategy,” said Sweeney.

Despite the growing global awareness of emerging markets as a source of potential return, this sector remains a more inefficient research pool than developed markets particularly for those managers comfortable investing in the less heavily researched mid cap stocks.

“This gives fundamental, active managers with well formulated investment research processes a greater opportunity to exploit insights gained from direct company contact and the research effort in general,” said Sweeney.

While Lonsec believes there are a number of credible investment options to obtain passive market beta, such as the MSCI Emerging Markets ETF or Vanguard Emerging Markets Shares Index Fund should a passive approach be desired, Lonsec prefers an active investment approach when allocating to emerging markets.

“Emerging market investors paying active fees should be more willing to afford active managers greater freedom in portfolio construction to add insight and ultimately, alpha,” commented Sweeney.

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