Only one in 50 active funds in the Investment Association universe have managed to achieve the highest ratings for both recent performance and the ESG credentials, research by Trustnet has found.
One of the standout trends in the investment industry is the rapid growth in environmental, social and governance (ESG) over recent years, as investors look beyond making just financial returns from their money and aim to have a positive impact as well.
But, as with any facet of investment, finding the funds that have strong track records for both can be a challenge.
In this research, Trustnet combines two leading rating methodologies to find out how many funds in the Investment Association universe have the highest ratings for both recent performance and ESG characteristics.
Of course, it should be remembered that past performance is not a guide to future returns.
For investment performance, we’ve used the FE fundinfo Crown Ratings while the ESG characteristics have been assessed using MSCI ESG Fund Ratings.
FE fundinfo Crown Ratings are designed to help investors identify active funds that are strongly outperforming their benchmark by looking for superior performance in terms of stock picking, consistency of outperformance against a credible benchmark and achievement of results at a relatively low risk over the past three years.
The top 10% of funds are awarded five FE fundinfo Crowns while the next 15% are given a four-crown rating, with the remaining three quartiles each given three, two or one crowns. A full explanation of the FE fundinfo Crown Ratings methodology can be found here.
Meanwhile, the MSCI ESG Fund Ratings provide greater transparency and understanding of ESG characteristics of funds.
Under this system, MSCI scores each fund on a scale from CCC to AAA, based on the weighted average ESG score of their underlying holdings, an assessment of their ESG momentum and exposure to the worst-rated companies. More details on the MSCI ESG Fund Ratings methodology can be found here.
There are 2,205 active funds in the Investment Association universe that have both a FE fundinfo Crown Rating and a MSCI ESG Fund Rating.
Just 46 of these – or 2.1% - have been awarded five FE fundinfo Crowns for their performance and an ESG rating of AAA from MSCI, as shown in the table below.
Distribution of funds by FE fundinfo Crown Rating and MSCI ESG Fund Rating
Source: MSCI, FE fundinfo
Japanese equities appear to be the area where investors have the best chance of finding a fund that has top ratings for both returns and ESG as 6.9% of those we looked at achieved this. All resided in the IA Japan sector, however, with no IA Japanese Smaller Companies funds scoring the highest rating in both systems.
European bond funds also came out well, with 6.1% holding top performance and ESG ratings. This was down to a strong showing from the IA EUR Corporate Bond sector, rather European sovereign, high yield or mixed bond funds.
UK equity funds came in third place, with 4% holding five crowns and an ESG rating of AAA. While no IA UK Smaller Companies funds achieved this, 10 members of the IA UK All Companies and IA UK Equity Income sectors managed to.
Meanwhile, in the IA Global sector – the largest peer group – just 1.9% of funds have top ratings under both systems.
An upcoming series on Trustnet will look at the main Investment Association sectors in more detail, to highlight the individual funds with top ratings from FE fundinfo and MSCI.
Widening the net to include funds with an FE fundinfo Crown Rating of four or five (so the top 25% of the industry) and a AA or AAA rating from MSCI (which means they are classed as ‘ESG Leaders’) brightens the picture somewhat: just under 15% of the Investment Association universe pass this slightly looser test.
However, there are examples of sectors that do not have a single fund with five crowns and a AAA rating for ESG, including IA Flexible Investment, IA Mixed Investment 20-60% Shares, IA Global Emerging Markets and IA Sterling Corporate Bond.
But none of the 2,025 funds we looked at in this research received the lowest rating of CCC under MSCI’s ESG methodology and just 0.7% received a B rating – the next lowest.
When combined with the crown ratings, just 0.2% of funds have a very low rating for both investment performance and ESG characteristics.
As mentioned, an upcoming series on Trustnet will examine sectors in more detail to reveal the funds that hold top scores in both the FE fundinfo Crown Ratings and a MSCI ESG Fund Ratings.