February 2008

PERFORMANCE: Have SRI funds had their (green) day?

"A lot of factors have now been aligned to make socially responsible funds perform better" - Niklas Tell (Tell Media Group) niklas_tell.jpgIt used to be argued that because of negative screening, ethical and similar types of funds were at a disadvantage. The basic argument was that a limited universe of stocks caused by negative screening would lead to a performance disadvantage. For two reasons we could be at a point in time where this argument no longer holds. First, On 10 December the Nobel Peace Prize was awarded to the Intergovernmental Panel on Climate Change (IPCC) and Al Gore. A cynic would see this as a good time to market socially responsible investment (SRI) funds, particularly green funds. Another view is to see this as the time when focus on these issues actually will lead to a performance advantage. Wim Vermeir, an executive at Dexia Asset Management, a fund group with long experience in SRI, commented on the Nobel prize in a recent interview, saying this showed green issues had become mainstream and that investments and politics were moving in the same direction. In short it means that a lot of factors have now been aligned to make these types of funds, including ethical funds, perform better. The simple explanation for why this will happen goes something like this. Listed companies that live up to what has, and will become, generally accepted standards – be that on ethical or environmental grounds – will trade at a higher valuation multiple than companies that disregard these issues. Second, while this first argument is likely to be a slow process, there is also a structural change taking place based on global warming. A few relatively new funds from DWS, Deutsche Bank’s retail funds arm, serve as a good example of how the asset management industry is catching on. DWS has identified three “structural, long-term megatrends” – global population, global warming and global depletion – which are seen as new risk factors. In order to address these risks and to benefit from future changes, the company launched three funds. There are some overlaps, but the idea is that the DWS Invest Global Agribusiness Fund should address the global population trend, the DWS Invest New Resources Fund will address the global depletion trend and the DWS Invest Climate Change Fund address the global warming trend. There are of course a lot of fund groups offering similar investments and, just as in any part of the fund market, some will be better than others at delivering value to investors. What has been outlined above does not mean it has become simpler for fund managers to outperform markets. Without a robust investment process, the right resources and the right people, these funds, just as any other fund in the world, will be more about marketing than about performance. Just as in the internet boom in 1999 it is today not clear which companies will be the winners and so it is not worth paying any multiple to be an owner. However, just as the internet boom proved back then, there are now also fundamental changes happening which will affect new and old companies alike. These are the reasons why today is the day to start looking more closely at funds previously dismissed as marketing gimmicks. Al Gore ended his Nobel speech in Oslo on 10 December with the following words: “We have everything we need to get started, save perhaps political will, but political will is a renewable resource. So let us renew it, and say together: ‘We have a purpose. We are many. For this purpose we will rise, and we will act’.”

• Niklas Tell is a partner at Tell Media Group ©  Funds Europe February 2008

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