Financial Mail 01 Jul 2010
By Stafford Thomas
Socially responsible investment (SRI) has a positive emotive ring. But does it make a difference where it counts most to investors: returns?
Element Investment Managers analyst David Couldridge believes it does. Element, he says, applies the UN’s Principles for Responsible Investment (UNPRI), which go beyond the fundamental issues affecting a company. Using these principles he delves into governance, environmental and social issues that may influence a company’s profit growth.
A key aspect of UNPRI is engaging with companies in which investments are held. A case in point is serial underperformer Nampak, the target of a concerted effort by Element and other shareholders to address governance flaws.
Their badgering bore fruit. Nampak now boasts a reshaped board, a nonexecutive chairman, a new growth strategy and a new CEO. In the first quarter of 2010, Nampak was bought by 26 unit trusts and sold by only nine.
Couldridge’s claim of enhanced returns is supported by Element’s Earth Equity Fund (EEF), which over the past 36 months delivered an 8,1% return, ranking it eighth out of 63 funds in the general equity sector, where the average return was -0,2%.
Also beating the average, with a 1,7% return, was 26th-ranked Old Mutual’s Community Growth Equity Fund (CEG), which focuses on companies “contributing to the economic sustainability of SA”.
But neither EEF nor CEG make a convincing case for the superiority of SRI when compared with the average 18% return of the top-five funds and a best 22,7% from Absa Select Equity.
Also casting doubt is the JSE socially responsible investment index, comprising 67 companies meeting UNPRI criteria. Since its launch in May 2005 the index has produced a total return (capital plus income) of 198%, less than the all share index’s 208%.
Sharia funds are a variation on the SRI theme. Socially responsible in an Islamic context and no doubt in the eyes of many non-Muslim s, these funds exclude companies involved in, for example, alcohol, tobacco, gambling and banking. Returns from the three Sharia funds in existence over the past 36 months reflect an uninspiring best 4,8% from Element Islamic Equity and a dismal worst -22,5% from Futuregrowth Albaraka Equity.
Not helping the SRI cause is a study by UK financial services research firm Moneyfacts based on the UK’s 63 SRI funds. Over three years to May 1 the SRI funds delivered an average total return of -7,2% compared with 3,6% from non-SRI funds. Over five years SRI funds averaged 33,5% and non-SRI funds 45,9%.
But Futuregrowth CIO Andrew Canter stresses that SRI can deliver superior returns. Proving his point is the institutional Futuregrowth Infrastructure & Development Bond Fund, focused on bonds issued to fund infrastructure and social upliftment projects. “The fund has beaten its benchmark for 15 years,” says Canter.
Indicatively, the fund’s average annual return of 9,36% over 36 months to March 31 2010 beat the 7,45% of its benchmark, the all bond index plus 1%, by a wide margin.
Putting an academically objective slant on the SRI debate is Neil Eccles, programme manager of the University of SA’s Noah Chair in Responsible Investment. “It [SRI] is a very ideological issue,” says Eccles. “Those who don’t like it present data to prove their point and those who do like it do the same.”
In reality, says Eccles, over 100 academic studies produced over the past 35 years indicate that SRI funds do not outperform non-SRI funds. About 60% of SRI funds produce returns similar to non-SRI funds, while 20% outperform and 20% underperform, he adds.
Will SRI change the world? Apparently the world’s top 20 asset management companies think not, with none featuring among the 350 UNPRI’s signatories.
