SRI does not improve equity fund risk/returns, Fitch finds
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Investors should not allow a focus on socially responsible investment (SRI) to blind them to poor equity fund management process, Fitch Ratings warns.
Aymeric Poizot, head of Fitch’s Europe, the Middle East and Africa fund and asset management group, points out that SRI funds have become increasingly popular as attention has shifted towards concerns such as environmental policies, social responsibility and corporate governance.
According to Fitch, SRI funds in the European and eurozone equity Lipper categories have underperformed their non-SRI peers by 0.6% annually on average over the last three years.
“Market participants often view SRI as a lower risk and more defensive stock picking strategy,” Poizot says. “This has not been confirmed in the past three years as SRI funds have exhibited slightly higher volatility and drawdown.”
SRI funds have displayed average volatility of 19.5% and drawdown of -23.2% during the past three years. In their non-SRI counterparts, these averages are a respective 18.8% and -21.7%.
“SRI is no protection to poor or average investment processes and Fitch highlights that SRI in itself has not improved the average risk/return profile of a European equity fund in the recent past,” Poizot adds.
However, the ratings agency says the use of SRI filters has added value to euro bond fund categories, excluding pure corporate, over the same period. SRI funds show a 0.2% annualised outperformance to non-SRI peers, with lower volatility and drawdowns.
“When applied to bond funds, SRI criteria reinforce fundamental biases and have resulted in greater deviation relative to debt-weighted indices, notably on peripheral sovereign and bank debt,” Poizot concludes.
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Readers' comments (2)
Jeremy Newbegin | 25 Jun 2012 2:41 pm
After some twenty six years of being involved in SRI and its various formats, it has become clear that in difficult market conditions SRI Funds underperform the average. However, in good market conditions the opposite is true. I suspect that as SRI continues to mature so this contrast will become less evident.
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Richard | 26 Jun 2012 8:15 am
When have SRI funds ever promoted themselves as lower risk / reward strategy compared to their non-SRI competition? Not sure if they have / do.
This is a concept sale and a differentiator.
By and large, SRI funds tend to be chock full of mid and small cap stocks, thus in good market conditions the beta works in their favour, and we haven't really witnessed good market conditions over the past 3 years.
Fitch should know better. Poor performance over the last 3 years doesn't equate to poor investment management process - especially when your investment universe is different to the wider market.
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