It might be known as impact investing, but socially responsible investment (SRI) apparently has yet to make its mark in the industry.
Data from Morningstar indicates that more than 200 mutual funds and ETFs with a “sustainable” investment strategy are now available, according to Financial Advisor IQ
. However, the consulting firm also reported US$76 billion in net assets gathered by such funds as of last week — accounting for just 0.45% of the total US-based mutual-funds and ETF market.
In a survey last year, the Financial Times
reported just 4% of investment firms focusing on opportunities in socially responsible investing. Nevertheless, asset managers and major brokerages are attempting to sell such funds. Industry trade groups, foundations, and other non-profits also argue that taking institutional investors in ethical strategies into account would better reflect the true scale of investments that account for environment, social, and governance (ESG) issues.
Many advisors are on the fence. Nancy Skeans, CEO of US-based firm Schneider Downs Wealth Management Advisors, said she thinks asset managers are getting carried away in producing funds that focus on ESG issues.
However, she admitted there’s value in keeping an eye on the retail ESG marketplace, which some forecast could double in a few years’ time. This could also be valuable as her firm’s clientele expands to include more up-and-coming young professionals.
“We’re keeping on top of this emerging ESG market and are excited about its potential,” she told Financial Advisor IQ
. “Right now, though, we’re not seeing any surge of interest – the ESG marketplace still has a way to go to make a bigger dent in our clients’ long-term investment plans.”
Cameron Aydlett of Triad Financial Advisors, meanwhile, said she tries to remain “objective” and “manage expectations” concerning SRI investments. Clients should be informed of the short track records that many ESG funds hold, as well as the likelihood of higher fees charged by managers that implement niche strategies to follow specific investment parameters.
Incorporating such funds can also make portfolio management a problem. According to Thomas Greco, who heads the investment committee at Concentus Wealth Advisors, many popular SRI funds deliver “spotty exposure” to names that his clients are really eyeing. Adding to the complexity is the fact that funds use different screening methods. With all those considerations, Greco said, there’s a greater risk of injecting added market volatility into client allocations.
“In a perfect world, all of our clients would be investing with a social conscience and the market would greatly reward those companies,” he said. “But at this point, we just don’t see the stock market creating enough clear SRI winners to recommend wholesale changes in investors' long-term asset allocation plans.”
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