SRI does not improve equity fund risk/returns, Fitch finds
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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