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Share Watch – Morningstar reviews three ESG funds

Updated: Nov 8, 2022

From Stockhead:

The ESG funds industry has become a $35 trillion behemoth and is now estimated to be at least 50% larger than the US economy.

But the sector is at an inflection point and faces several challenges. The biggest is “greenwashing” and the growing scepticism that ESG investments are not as “sustainable” or “socially responsible” as they seem.

Despite these problems, investors worldwide are still in the hunt for these thematics. The number of ESG funds are increasing rapidly and at the moment, there are more than 170 sustainable funds in the Australasia region alone.

Research firm Morningstar has taken three of these funds and added them to its coverage – which should be very interesting for ethically minded investors.

Interestingly, Morningstar has also added an ESG Commitment Level (or ECL) for each of the asset managers covered.

The ECL is an assessment of how asset managers incorporate ESG factors into their investment processes by using Morningstar’s own four-tier scale: Leader, Advanced, Basic, and Low.

Pendal Sustainable Australian Fixed Interest (APIR Code: BTA0507AU)

Morningstar Category: Bonds – Australia Neutral rating ESG Commitment Level of Asset Manager: Basic

Morningstar believes the Pendal Sustainable Australian Fixed Interest fund is an acceptable starting point to gain access to a portfolio of ESG-focused bonds.

The strategy invests in Australian domestic government, semi-government, and credit securities – with a tilt towards green, social, and sustainable bonds.

The fund uses a combination of in-house and third-party ESG data and research for positive and negative screening, portfolio construction, and issuer assessment.

Corporate bonds have historically been the main driver of the fund’s returns and made up 36% of the portfolio as of January. The fund invests in sectors such as infrastructure and utilities.

The portfolio’s duration can range between plus or minus two years relative to the Bloomberg AusBond Composite Index, and Morningstar believes there’s an opportunity here to profit from changes in interest rates.

As changes in monetary policy usually affects the short end of the curve, unexpected rise in rates or widening of credit spreads could impact on the portfolio.

Morningstar says that team changes across the broader group also poses some concern.

George Bishay is currently the lead portfolio manager, and has been since the strategy’s inception, with Tim Hext providing support.

While the two display decent insights within their respective fields and have credible experience, there have been significant management changes to the fund overall.

Meanwhile, the fund’s annual fee of 0.40% is competitive against peers.

In summary, Morningstar says the Pendal Sustainable Australasia Fixed Interest is a sufficient offering for fixed-interest ESG exposure despite certain shortcomings.

Bell Global Emerging Companies (APIR Code: BPF0029AU)

Morningstar Category: Equity World Mid/Small Silver rating ESG Commitment Level, Asset Manager: Basic

The Bell Global Emerging Companies strategy defines its universe as the bottom 28% of the MSCI World Index, giving it the flexibility to own companies in a broader market-cap range than typical peers.

Companies included in the Bell portfolio must be at least US$1 billion in size.

As of 28 February, the average market cap of the fund was much higher than that, at $19.587 billion, compared with the index average in that category of $9.663 billion.

The strategy is effectively a subset of the flagship Bell Global Equities, which is an all-cap mandate.

Bell has strict quality thresholds that require companies to deliver at least 15% return on equity, and companies that fail to achieve this over three years get weeded out.

The portfolio has a negative screening in place, with ESG exclusions for tobacco and controversial weapons, as well as reduced exposures to sectors such as fossil fuels, uranium, cluster munitions, and gambling.

Companies that meet the fund’s criteria are then assessed for management quality and governance.

Bell also considers fundamental factors and aims to provide a portfolio with better-than-benchmark ESG attributes and lower-than-benchmark carbon intensity.

Only around 150 names meet the manager’s strict criteria, and from that, a portfolio of 35-55 stocks are selected on the basis of attractive relative valuation and diversification.

There are some consistent portfolio biases and sectors such as healthcare, technology, and consumer names are favoured; whereas financials, energy, and utilities are not.

The fund is managed by Ned Bell and Adrian Martuccio. Bell launched the flagship all-cap global strategy in 2003 and was joined by Martuccio in 2007.

Bell Asset Management is a profitable boutique that is majority staff-owned, while the founding Bell Group Holdings maintains around a 40% interest.

According to Morningstar, this promotes team alignment and stability and it believes that overall, the Bell Global Emerging Companies fund is an excellent option for global small and mid-caps equities exposure.

Stewart Investors Global Emerging Markets Leaders Sustainability (APIR Code: PIM1937AU)

Morningstar Category: Equity Emerging Markets Silver rating ESG Commitment Level, Asset Manager: Leader

Morningstar says the Stewart Investors Global Emerging Markets Leaders Sustainability fund is a strong option within the emerging-markets category.

This is due to the fund’s investment approach, executed by a capable investment team.

Launched in September 2021, the strategy is the larger-cap sibling to the existing all-cap strategy managed by the Stewart Investors Sustainable Funds Group.

The strategy’s approach is well-codified and robust, where it seeks around 25 to 60 stocks capable of delivering sustainable and predictable growth.

The fund tries to invest alongside founders in family-owned businesses where possible.

The portfolio managers also home in on firms whose revenues are less likely to be impacted during economic downturns, which means that it has historically shown a preference for consumer staples.

Conversely, given its mandate, which focuses on companies that benefit from sustainable development, the portfolio’s energy and mining exposures are limited.

Lower-than-average volatility and strong downside protection are hallmarks of SFG’s approach, which are appealing features within the emerging-markets category.

The fund’s team is in the process of taking over a similar “leaders” strategy that was run by the St Andrews Partners arm of Stewart.

Jack Nelson is currently the lead portfolio manager and he is backed by a strong supporting cast, including the highly experienced David Gait.

Morningstar believes the SFG team has exhibited a high degree of stability and has deep expertise across the emerging markets, especially within the Asia-Pacific region.

Overall, Morningstar says that the Stewart Investors Global Emerging Markets Leaders Sustainability represents a strong option for ESG investors.

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