Responsible investment funds underperform in March

Australian and international equity funds with high responsible investment (RI) ratings underperformed their market benchmarks in the March quarter, following a rotation out of tech stocks and into energy and oil.

Top-quartile Australian equity managers in the Evergreen Responsible Investment Grading (ERIG) index returned negative 4.48% in the quarter, compared with a 9.19% rise in the S&P/ASX 200 Index.

Top-quartile international equity managers in the ERIG index returned negative 31.29% in the quarter, compared with a fall of 21.8% in the MSCI World index.

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The ERIG index assigned responsible investment grades to fund managers, focusing on what a fund manager’s investment process does with respect to RI, rather than just looking at RI scores for portfolio companies.

Evergreen Ratings founder and chief executive, Angela Ashton, said fund managers with a responsible investment or environmental, social and governance (ESG) tilt tended to favour tech stocks and avoid energy, materials and energy stocks, factoring into their March underperformance.

“It is only one quarter of performance and there were unusual circumstances, with the start of the Ukraine war, supply chain bottlenecks coming out of COVID and rising inflation. But it does highlight the fact that it is still a fairly small universe of stocks for RI managers. There are not a lot of opportunities, especially in Australia.

“Long term, we believe Australian and international RI managers will deliver superior performance but what we saw in the March quarter is that in the short term there will be some growing pains for the sector.”

The ERIG index ratings were based on seven RI capabilities: ESG integration; negative screening; norms-based screening; active ownership; positive screening; sustainability-themed investments; and impact investing.

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Based on the comments in this article, I question whether Evergreen truly appreciate the damage "only one quarter of performance" has done to their client portflios. Negative 31.29% is an extraordinary amount to lose over any timeframe! Also it would be good to understand on what basis Evergreen "believe" RI managers will outperform in future? Very simplistic.

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