Fund managers hope for more robust socially conscious options

Money managers work to build products for younger investors, who are expected to favor values-driven investing

Jul 22, 2014 @ 2:26 pm

By Trevor Hunnicutt

esg, sri, socially responsible investing, values investing, impact investing
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There was a time when asset management firms were comfortable telling faith-based investors, "God is good, see you later," says Joseph M. Kinard, a director at the Board of Pensions of the Presbyterian Church (USA).

That's no longer the case. The group, which manages more than more than $9 billion and has nearly 20,000 church pensioners, is increasingly wielding its assets to work in a way that better aligns with its values.

“We had to take our money back and our narrative back,” said Mr. Kinard. "You could be blind as a bat and make money. The question is what are you doing for the future?"

Institutional investors and wealthy individuals are increasingly asking investment consultants about how they can affect their values through investing, according to Nicholas Elfner, director of corporate research for bond manager Breckinridge Capital Advisors.

Both men spoke Tuesday at a conference in New York that brought together researchers and money managers looking to build out the $3.7 trillion U.S. market for socially conscious investing.

Fund managers are increasingly finding alignment with their vendors, including financial advisers' employers, that social responsibility will increasingly guide how investors choose where to put their money. And that may be a good thing as the metrics may offer new ways to look at the risks faced by companies, according to portfolio managers who work in the space.

But for now, investors who want their investing choices guided by religious, environmental or other social values are still navigating a small segment of the industry that's still working to prove, consistently, that their investments can deliver material — and not just feel-good — results.

Across asset classes, managers have an uphill battle because in some cases, their performance has been weak.

Take fixed income. The asset class embodies some of the key facets of socially responsible investing. For one, the options are limited — fixed-income accounts for less than a fifth of SRI funds in the U.S. and two firms, Calvert Investment Management Inc. and Pacific Investment Management Co. control more than half the market. At the same time, performance is all over the map.

Henry Shilling, a senior vice president for Moody's Analytics, studied fixed-income funds with environmental, social and corporate governance factors over the one-, three-, five- and 10-year periods ended June 30.

“If you combine them all together in each of these time periods, less than 50% of the funds outperform the appropriate securities market index, which is the Barclays U.S. Aggregate Bond Index,” said Mr. Shilling.

On the surface, that would suggest the funds are underperforming. But a subset of the funds — ones that proactively took ESG factors into account (rather than merely screening out unwanted companies) — were among those that actually beat the benchmark over the one-, three- and five-year periods, according to Moody's.

Mutual funds with a socially conscious investing mandate hold roughly $82 billion in assets, with flows so far this year exceeding $1 billion, according to research firm Morningstar Inc. That's double the amount held by the funds in 2004, but a tiny share of $15 trillion U.S. mutual fund industry.

But a number of luminaries in the brokerage and investment advisory business — from wirehouses to custodians for independent advisers — think the products have a bright future. Industry executives have said younger investors are increasingly willing to impose their values on their investment portfolios.

“I would look at your organization at the percentage of time you're thinking about impact-oriented investments — environmental, social justice strategies — and I would double or triple it,” Andrew Sieg, managing director and head of global wealth and retirement solutions at Bank of America Merrill Lynch, told some of the world's largest money managers in May.

But socially conscious investing is increasingly providing metrics that investors are using to understand the risks in their portfolios, according to Laura Nishikawa, vice president and head of fixed income ESG research for MSCI Inc., a data and index provider.

Ms. Nishikawa said MSCI's clients are looking at data around corporate governance and environmental risks, for instance, to understand issues such as the “headline” risk of oil spills on energy companies, the impact of climate change on the duration risk of their fixed-income portfolios and to chart how droughts might put pressure on municipal debt.

Mr. Elfner said that because his firm is focused on high-credit debt issuers, there's more downside risk than upside possibility to their investments.

“ESG is very handy for assessing the risk,” he said. “Shame on us if we don't look at it and factor it into our process."

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