SRI offers advantages for advisors

How are advisors uncovering value from investments rooted in values?

SRI offers advantages for advisors
While news surrounding actively managed funds has been generally gloomy, advisors who prefer these over passive funds have found a bright spot in socially responsible investing, according to a report from Financial Advisor IQ.

Citing Morningstar data, the article said that SRI fund assets jumped 76% to reach US$201.3 billion through September, with active mutual funds and ETFs comprising 83% of the total. Morningstar estimates also showed more than $1 billion pouring into SRI stock funds in the first eight months of 2016, compared to an investor pullout of US$161 billion from US stock funds overall during the same period.

Despite this, many advisors still seem to be shying away, with recent industry surveys estimating that 60%-70% of US FA’s have not yet hopped onto the values-based investing bandwagon.

“Passive funds have their place, but we warn clients against ignoring active management’s positive long-term attributes,” said Raymond James & Associates advisor Sacha Millstone, who has been managing portfolios with a socially responsible flavor for 30 years.

Given the short history of most ESG-oriented index mutual funds and ETFs, Millstone has found it challenging to allocate her clients’ assets to passives over the long term. Mirroring this is a relative scarcity in such products, with Morningstar estimating a ratio of more than 3-1 between active SRI-themed funds and their passive counterparts. Her SRI-oriented clients, therefore, have less opportunity to enjoy low-cost investment in passive funds.

“[C]lients want to know these days why they need to pay up for active management,” said Millstone, who justifies the need through charts that show veteran active fund managers successfully navigating through the chaos during market meltdowns.

F.L. Putnam Investment Management CEO Tom Manning peppers his firm’s sustainable portfolios with passive funds, with the majority of each portfolio’s blend taking an active approach, either through mutual funds or his staff’s stock picks. “[I]t’s hard to sift through an index to match an individual’s core value system,” he said.

Molly Betournay, head of impact investing at Pathstone Federal Street agreed, saying that savvy active managers often make selections based on nuanced and involved criteria such as tethering of top officials’ bonuses to greenhouse emission targets, workplace gender representation, and taxes paid in comparison to profits made. “We believe that a deeper dive into ESG factors is a good way to find pockets of opportunities that aren’t always the same as index-tracking funds might find,” she said.

Related stories:
The strategy more Ontario investors need to know about
Is gender diversity worth looking into for ESG investors?