Responsible funds still susceptible to market downturn: RIAA

Responsible funds are outperforming in the international share and multi-sector growth but less so in Australian equities, according to a report.

According to the annual ‘Responsible Investment Benchmark Report 2021’ from the Responsible Investment Association of Australasia (RIAA) and KPMG, the proportion of responsible investment assets under management (AUM) to total managed funds grew from 31% in 2019 to 40% in 2020.

While it was largely acknowledged that investors no longer needed to sacrifice returns to invest responsibly, the RIAA said the pandemic had affected their performance in the same way as non-responsible funds.

It said: “In 2020, the performance of all funds tumbled over the one-year timeframe compared to 2019 and to a lesser extent over the three and five-year time horizons.

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“Despite economic setbacks, responsible investment funds outperformed both the international share and multi-sector growth funds in 2020, performed on par with the Australia Fund Equity Large Blend, but underperformed compared to the S&P/ASX 300 over three and five years.”

Over one year, the average responsible investment multi-sector growth fund returned 7.2% compared to returns of 2.9% by the Morningstar category: Australia fund multi-sector growth.

For international share funds, the average responsible investment international share fund returned 8.3% compared to 5.7% returns by the Morningstar category: Equity World Large Blend.

But for Australian share funds, the average responsible investment Australia/New Zealand share fund returned 1.7% which was in line with the S&P/ASX 300 and the Morningstar category: Australia Fund Equity Australia Large Blend.

This one-year performance subsequently dragged down long-term performance with the average responsible investment Australia/New Zealand share fund underperforming over three and five years.

“One possible explanation is that companies with mid- and small-market capitalisation, which are included in the S&P/ ASX 300 but not in the Australia Fund Equity Australia Large Blend, fared better than large market cap equities in 2020 overall,” the report stated.

Concluding, the RIAA said: “Monitoring the performance of responsible investment funds compared to mainstream funds will remain important for the near future, particularly as economies begin to recover from the long-term impact of the COVID-19 pandemic.

“As responsible investing becomes the norm, and an ever-increasing proportion of Total Managed Funds become managed to responsible investing approaches, RIAA anticipates the performance of responsible investment funds and mainstream funds (measured as weighted average performance net of fees over 10 years) will ultimately converge.”