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All Contents © 2018The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 1, 2018From Kiplinger’s Personal Finance
Socially conscious investing has gone mainstream with many people now factoring environmental, social and corporate governance criteria—the ESG triumvirate that define so-called sustainable investing—into their portfolio decisions. In fact, worldwide investment firm Schroders reports that, over the past five years, 70% of U.S. investors have increased their allocation to ESG investments. In 2018, 43% of U.S. institutional investors—endowments, foundations and pension plans—incorporated ESG factors into their decision-making process, nearly twice the percentage in 2013.
One driving reason for the increased interest in values investing: The strategy has proven to reward investors just as well as other investing approaches. In fact, we found five actively managed funds—four stock funds and one bond portfolio—that combine an ESG ethos with stellar returns. Nearly all beat their benchmarks over the past five years (one has a shorter, but still impressive, track record). Take a look.
All returns and data are through Oct. 12, 2018. Source: Morningstar Inc.
Total 1-year return: 11.1%
Annualized 3-year return: 12.8%
Annualized 5-year return: 11.7%*
Minimum initial investment: $2,500
Expense ratio: 1.00%
Although American Century Sustainable Equity (AFDIX) has been around since 2005, it only morphed into an ESG-focused fund two years ago. But the managers behind the fund did a lot of research on how to build a good ESG-focused portfolio and still deliver competitive long-term financial performance. “We wanted to appear attractive to sustainable investors and sustainable-agnostic investors,” says comanager Joe Reiland.
The result is a portfolio built in part with quantitative help—using a screen for attractively priced high-quality firms with strong cash flows, earnings and profit margins—followed up by a lot of due diligence on ESG attributes and scrutiny of company financials.
On the ESG side, the managers start with ratings from MSCI and Sustainalytics, then dig deeper and look for anomalies. During the fund’s transition to an ESG portfolio, for instance, ExxonMobil shares got the boot because the company lagged its peers on environmental initiatives. ConocoPhillips, however, had an action plan to lower its greenhouse gas emissions, among other things. Conoco’s stock stayed in the fund, and the managers even added more shares. Since mid 2016, when the ESG portfolio debuted, the fund has returned 16.7% annualized, 1.5 percentage points ahead of Standard & Poor’s 500-stock index.
*Record prior to the fund adopting an ESG-integrated process.
Total 1-year return: 5.8%
Annualized 3-year return: 9.6%
Annualized 5-year return: 9.5%
Minimum initial investment: $1,000
Expense ratio: 1.01%
The managers at Ariel (ARGFX) have been socially conscious for decades. “We didn’t always market ourselves that way,” says head of ESG research Tim Fidler. But John Rogers, Ariel’s lead manager and a founder of the firm, has been advocating for financial literacy, diversity in the workplace and minority outreach for many years.
Rogers and his two comanagers, Ken Kuhrt and John Miller, focus on attractively priced small to midsize companies that generate a lot of cash. The firm’s ESG hot buttons—minority inclusion and diversity—were the main reasons the team added International Speedway to the portfolio in mid 2012.
Executives of the motor-sport racetrack operator wanted to expand its fan base geographically and also appeal to women and people of color, and they did so in a smart way. The company set up a program to attract and develop minority drivers, and it added women, African-American and Latino members to the board. It was “a win-win” says Fidler, from a social and business perspective.
The fund delivers on performance, but be prepared for a rocky ride. Over the past five years, the fund’s 9.5% annualized return handily beat its benchmark, the Russell 2500 Value index, but the fund was 24% more volatile.
Total 1-year return: 15.7%
Annualized 3-year return: 14.6%
Annualized 5-year return: 14.0%
Minimum initial investment: $100
Expense ratio: 0.88%
Managers Karina Funk and David Powell didn’t set out to run an ESG fund. But in their search for large, growing companies with sustainable business advantages, they put firms through the wringer to assess their opportunities and risks from a variety of viewpoints, many of which are ESG-focused. “We turn over a lot of rocks,” says Funk.
Brown Advisory Sustainable Growth (BIAWX) owns shares of Ecolab, whose cleaning supplies and appliances help hospitals, hotels, schools and the like mop floors, do laundry and wash dishes. “Some of the cleaning solutions are less caustic and ‘greener,’ but the bigger environmental angle is the company helps customers use fewer resources and save on water, energy, chemicals and labor costs,” says Funk. Over the past five years, the fund’s 14.0% annualized return beats the S&P 500 by an average of 1.5 percentage points per year.
Total 1-year return: 3.1%
Annualized 3-year return: 13.2%
Annualized 5-year return: 13.8%
Minimum initial investment: $2,000
Expense ratio: 0.92%
Parnassus has a range of solid ESG funds, including Parnassus Mid Cap (PARMX), a member of the Kiplinger 25, our favorite no-load funds.
Parnassus Endeavor (PARWX)—run by Jerome Dodson, the founder of the firm, and comanager Billy Hwan—has a targeted take on ESG. The fund’s ideal investment is a large, growing firm with an excellent working environment in addition to positive attributes, such as a competitive advantage over peers, a strong management team spending cash wisely, and evidence of other sustainable, social and ethical business practices. But happy employees are first and foremost. The thinking is that they will be more productive and make the company successful. The fund also avoids fossil-fuel companies.
Dodson, who is in his seventies, will soon step down as the firm’s chief executive. He remains at Endeavor, though, with no current plans to leave. Endeavor has beaten the S&P 500 and other similar funds in six of the past 10 full calendar years.
Total 1-year return: -1.5%
Annualized 3-year return: 1.4%
Annualized 5-year return: 2.9%
Expense ratio: 0.65%
Manager Stephen Liberatore has proved that he can invest in debt issued by companies that are doing good and still deliver competitive returns. In the six-plus years since the fund opened, Social Choice Bond (TSBRX) has returned 2.3% annualized, which beats the Bloomberg Barclays U.S. Aggregate Bond index and the typical intermediate-term bond fund.
The managers invest roughly 60% of the fund’s assets in companies that win good ESG ratings from data providers MSCI and Sustainalytics and then pass muster based on the managers’ own financial analysis. The rest of the assets are devoted to roughly 200 impact investments: projects and groups that generate a measurable and positive impact on society, whether it’s by providing clean water or affordable housing or by creating economic development opportunities.
In one project, the firm worked with a small Utah sewer district to invest in a bio-gas plant that will take solid waste and use it to power 25,000 homes. “It’s the CO2 equivalent of taking 36,000 cars off the road,” says Liberatore. The fund yields 2.8%.
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