Rating ‘responsible’ funds

Opting for a socially responsible investment fund might salve your conscience, but are these funds really that different from mainstream portfolios? A new rating tool now has been developed to answer this question.

Rating Planets is a new project from Novethic, a resource center for so-called socially responsible investing, in partnership with Morningstar France and Vigeo, a group that analyzes European companies. The rating tool measures the social responsibility of 480 investment funds sold in France by crossing portfolio composition, supplied by Morningstar, with individual company ratings from Vigeo.

Vigeo assesses a company using around 40 criteria in five broad categories including human resources, clients’ suppliers, environment, corporate governance and community and society.

Typically, companies that score well show a positive approach to the environment and to social issues like employee rights and equal opportunities. The agency takes a dim view of companies that encourage dangerous or addictive activities, like tobacco producers.

The funds are then rated on a scale of one to five "Planets," with five being the top score.

The first findings, published last week, suggest that funds that carry the socially responsible label are resolutely more "responsible" than conventional funds. That comes as no surprise, although some investors may be intrigued by the large number of mainstream funds that achieve a high rating.

One-third of conventional funds were awarded either four or five Planets, compared with 87 percent of the "responsible" funds.

Not one socially responsible, or SRI, fund was rated below three Planets. In contrast, 27 percent of the non-SRI funds were.

Jean-Pierre Sicard of Novethic said that the market capitalization of portfolio holdings and their country of origin could have a significant impact on a fund’s rating. This might help explain why a large number of conventional funds appear to be so wholesome.

The CAC-40 index in France and the Dow Jones UK Titans 50 index each earned four Planets, which suggests that, on average and across most industries, large French and British corporations are more socially responsible than many of their peers. By contrast, the Dutch index was awarded two Planets, while the Belgian, Danish, Italian and Spanish indexes received just one.

A significant gap also separated large, middle and small-capitalization stocks. While the DJ Stoxx 600, a benchmark European midcap index, rated just three Planets, the Dow Jones Europe 50, which includes Europe’s largest companies by market capitalization, got four.

Stephen Weygood, director of investor responsibility at Insight Investments in London, said any initiative that enhanced the transparency of socially responsible funds should be welcomed. He expressed some reservations, however, about Rating Planets’ methodology.

"There are so many different interpretations of what constitutes a socially responsible fund that any attempt to grade portfolios using a finite set of criteria is bound to be fraught with inconsistencies," he said.

"Many pure engagement funds, which use shareholder pressure to encourage best practice, would probably not get a high rating, because they do not aim to exclude particular industries or companies," Weygood added. "Investors would have to ask themselves if these funds were any less socially responsible than other SRI-labeled portfolios."

Xavier de Bayser, president of Integral Development Asset Management in Paris, a subsidiary of Crédit Agricole, said that Rating Planets suited the French market, where the shareholder engagement approach is not yet widespread. He suggested, however, that the initiative needed to go further.

"As the size of a company has an impact on the degree to which fund management takes SRI factors into account," de Bayser said, "it would be helpful to make a distinction between large-, mid- and small-cap funds."

De Bayser also pointed out that Rating Planets did not provide investors with information about sector weightings or risk.

"A fund with 20 stocks might get top marks for being socially responsible, but if these stocks are all in the same sector, the risk element is significantly higher than for more diversified funds," he said.

The appetite for socially responsible investment is growing in France. Assets under management surpassed €5 billion, or $6.6 billion, in 2004, compared with €2.5 billion in 2002. But if the industry is to shed its niche status, it will need to demonstrate that socially responsible investment returns are at least as good as those achieved by the mainstream funds universe.

Ralf Oberbannscheidt, portfolio manager of DWS Invest Sustainable Leaders, based in Frankfurt, said that it was difficult to generalize about performance as every fund was different in terms of its risk profile and investment mandate.

"The Dow Jones Sustainable index has outperformed the MSCI World index by around 23 percent in the last decade, but it would be misleading to say that socially responsible investing drove that performance," he said. "Some analysts would argue that the SRI index outperformed because it was overweight in sectors which happened to do well over the period under review."

And although it is only beginning, Rating Planets might just be a wake-up call for the fund management industry. De Bayser suggested that if more mainstream fund managers took social-responsibility factors into account, the market would start to price in good corporate governance and other desirable company features.

By Barbara Wall International Herald Tribune
Tuesday, March 22, 2005

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