This week is all about ESG at Morningstar.co.uk. Today we are looking UK funds that are highly rated by Morningstar analysts and have a high Sustainability Rating.
Our results show investors don’t have to sacrifice performance in the pursuit of ESG goals, although 2022’s market shakeout spared very few strategies.
Methodology-wise, here’s how we did it. We screened the 6,760 funds with a Morningstar Sustainability Rating and narrowed those down with 4 and 5 Globes, which means they are rated as Above Average or High on ESG issues. Last year we ran the same screen and it came up with 50 funds. That's now increased to 67 funds.
We’ve created two tables, one showing the top five funds with 5 Globes that have the highest 5-year total annualised return. Last year Bronze-rated Royal London Sustainable Leaders was the best performer in the 5 Globe cohort with a 15.78% return over five years.
This year the crown goes to Stewart Investors Indian Subcontinent Sustainability, which has a Morningstar Analyst Rating of Gold and 5 Globes.
Its 5-year annualised return is 12% and the fund is the only one in the elite group to have posted positive returns in the year to date. For longer-term investors, the 10-year annualised performance is the highest in the top five, with a return of 14.64%.
Astute readers will notice that the Stewart Investors fund makes it on to both tables and the fund is also the only one to belong to the India Equity category (other single category entries include Greater China Equity).
Morningstar analysts rated the Stewart Investors fund highly, praising its "top-notch portfolio manager, and a solid investment team with best-in-class investment culture".
"The strategy employs a unique, quality and sustainability-focused approach, with an absolute return mindset," says Morningstar’s Ramanand Kothari.
The portfolio is conviction-driven and concentrated with 30-40 holdings including automotive group Mahindra & Mahindra and bicycle engineering firm Tube Investments of India.
India has not been immune to the global sell-off, but has been more resilient than some Western markets. Looking at the Morningstar India index, it’s had a strong third quarter in local currency terms – gaining 8%. But calculated in dollars, the index is down year-to-date.
Looking at the full list, a number of fund companies crop up frequently: abrdn has eight funds on the list, Fidelity, JP Morgan and Liontrust have five.
Some 38 funds have a Morningstar Analyst Rating of Bronze, meanwhile, and 21 have a Silver Rating. Eight have a Gold Rating. There’s a wide spread of categories and territories, including Europe, Japan, emerging markets.
Allocation funds, which our fund flows data shows are increasingly popular with investors, are well represented in the long list. If you include flexible allocation funds, the wider category makes up 17 of the 67 funds with a Globe Rating of 4 and above.
On top of the well-established globe ratings, Morningstar also has an enhanced risk rating system known as the ESG Commitment Level, which has a range of gradings from Low to Leader, with Basic and Advanced in between.
This rating applies to both the fund strategy and the asset manager, so the ratings can be mixed: a fund manager can be rated a "Basic" under the commitment level but one of its funds can be rated as "Advanced". Last year 52 funds with 4 globes and above, 12 are rated with the additional ESG Commitment Level. This year, that’s now 28 funds out of 67.
But the top-rated funds by 5-year returns have no funds rated by ESG Commitment Level, and of the Gold-rated funds, JPM Japan and Trojan have Basic ratings at the strategy level, and Fundsmith has a Low rating. No fund has the triple crown of 5 Globes, a Gold Rating and an ESG Commitment Level of Advanced – Fidelity Sustainable Asia Equity is close with 4 Globes, a Gold Rating and Advanced ESG Commitment Level, while Royal London Sustainable Leaders has 5 Globes and an Advanced ESG Commitment Level on both asset manager and strategy level. Perhaps next year we’ll have a fund with a clean sweep.
Focusing now on Gold-rated funds only, Fundsmith Equity and FSSA Greater China Growth are survivors from last year’s top five list.
While both have fallen year-to-date amid the wider stock market turbulence, Fundsmith's 5-year annualised return is near 10% and its 10-year return is over 15%. The FSSA Greater China fund boasts 5-year return figures of 4.77% and 10-year figures of 9.94%.
Recent China market volatility has compressed these longer term figures from last year – but Morningstar keep the faith with the fund and its manager, who they describe as an "expert investor".
"We continue to have confidence in FSSA Greater China Growth’s topnotch portfolio manager, the team’s outstanding investment culture, and a time-tested investment process," says analyst Germaine Share.
What do these tables tell us about ESG investing through funds? The first obvious point is that fund with high sustainability and analyst ratings are not immune to market wobbles.
In our wider list of 67 funds, only two have made positive returns this year so far: the previously mentioned Stewart Investors India fund, and Aviva Investors US Equity Income, which has a Bronze Rating and has posted returns of 5.62%.
The worst performer so far this year has been Jupiter UK Mid Cap, a 5 Globe fund that has fallen 43% this year. Barring a remarkable fourth quarter, the vast majority of the funds on the list are likely to remain in negative territory by the end of the year. Performance is important of course, but there’s always that tension between short-term numbers – which have been dire this year – and long-term potential.
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