IMA sector wouldn’t help SRI investors

31 January 2012 | By Neil Veitch

Yet, for investors seeking to invest in such a fund, it can be difficult to accurately gauge how well it has performed against its Investment Management Association (IMA) peer group. With no specific sector for such funds, they tend to be grouped together with non-SRI funds depending on their investment style and geographic focus. This is despite the fact that they often have restricted investment universes and very different risk/reward profiles. While some believe that the creation of a separate IMA category encompassing the whole SRI sector would be a solution, it is unclear whether this would make life any easier for investors when comparing performance.

A standalone ethical sector would not accurately reflect the differences between SRI funds. On the ‘lighter green’ end of the spectrum, there are those which have less restrictive mandates. Such funds may be precluded from investing in only a few sectors (such as tobacco or armaments companies) and may be more focused on corporate engagement. By contrast, ‘darker green’ funds often have stringent exclusionary policies or may only invest in companies involved in green technology. (blog continues below)

Clearly the risk profile of these two groupings will be very different. In 2011, for example, the oil and gas sector was one of the best performing sectors in the FTSE All-Share, rising 5%. Any fund whose mandate precluded investment in this sector would have been burdened by a significant handicap, making it much more difficult to match the performance of its ethical peer group.

For ‘light green’ funds, the existing IMA structure is more representative than any ethical category would prove – they are unlikely to share many similarities with dedicated clean-tech funds. To accurately allow investors to compare ‘like-for-like’, the IMA would need to create a plethora of sub-indices. Many of these would contain only a small handful of funds, which even at this sub-divided level would each have their own ethical screening processes and biases. 

The creation of a separate IMA category would not provide greater clarity for investors looking to compare the performance of SRI funds. The heterogeneous nature of the SRI sector does not lend itself to such simple top-down screening. Instead, investors must be aware of the different restrictions which fund managers are operating under and adjust their expectations and preferences accordingly.

^{Neil Veitch is fund manager of SVM Asset Management’s SVM All Europe SRI fund.}

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