Top Tips for understanding SRI performance

  • Diverse fund strategies = diverse performance. It is impossible to generalise about SRI fund performance because fund strategies are so diverse. For example, Clean Technology funds and screened Ethical funds generally have few holdings in common. Likewise, a UK equity fund will have little in common with an international bond fund. People do however sometimes generalise, which may be a function of not understanding the breadth of this market. Comparisons can however be made between SRI funds with similar strategies or specific funds and their similarly invested non-SRI peers. Splitting funds into Styles as we have suggested on this site is intended to help inform this process. The following bullets offer additional tips for advisers to look out for.
  • Normal rules apply. Investment sectors, geographic splits, asset types, fund manager skill and other regular drivers of performance are just as likely to impact performance of SRI funds as their SRI approaches. SRI considerations can have an impact of course, as do any other stock selection processes. They can lead funds to be less correlated with major indices than other funds. This does not (alone) imply SRI funds are likely to be any better or any worse than other funds but it can help explain both over and under performance over a given cycle.
  • IA view. Over the years the IA has carried out a range of research studies into the performance of ethical funds (screened funds) compared with other funds. Their assessment has tended to be that whilst performance varies funds generally perform similarly to other funds. Their current ethical investment fact sheet states: “Ethical funds are often perceived to be riskier than their non-ethical counterparts. This is because they tend to hold a higher percentage of shares in small and medium sized companies rather than large companies, and shares in smaller companies can be more volatile than those of lager companies. However, the charts below demonstrate that ethical funds do relatively well”.
  • Know the fund benchmark. Fund managers aim to beat their benchmarks. These may or may not be the same as the sectors they are classified within. It is useful to know what a fund’s benchmark is and whether or not (often unpublished) internal benchmarks are used. Ask fund managers whether or not they expect performance to be similar to mainstream benchmarks or significantly different given their investment strategy. Again, this does not imply the fund is ‘good or bad’ but it will help investors to understand why a fund may perform differently from its sector.
  • Degrees of avoidance. With screened ethical funds – look closely at how specific and absolute the negative screens are. If they do not say a fund will ‘definitely always avoid’ a particular area there is a chance they may invest in it. This may give the fund managers the opportunity to move into large cap stocks in difficult markets.
  • Room to manoeuvre. For themed and balanced funds in particular it is sometimes assumed that these funds are restricted in terms of where they can invest. In reality these funds often have plenty of room to manoeuvre and protect performance and investment performance will be impacted by generic drivers.
  • Company size. Expect movement between large and small caps as markets change. Many funds have policies that allow for a degree of movement depending on market conditions. Remembering flight to large caps tends to occur when there is significant uncertainty. Strictly screened (sometimes called ‘dark green’) funds often have less scope to move into large caps than most other funds, which can be a challenge in some market conditions – particularly where funds do not have a choice of geographic regions to move between.
  • Top ten holdings. Look at the top ten holdings of the fund to get an idea of where a fund invests. For liquidity and other reasons larger caps are normally more significant holdings (particularly in larger funds).
  • Narrow universes restrict choice. The narrower the possible field of investment the more testing difficult market conditions can be and the more uncorrelated performance is likely to become. This may not be relevant over the long term, but can impact short term performance – although the tight scrutiny these funds often enjoy can outweigh any downsides if fund managers substitute underweight sectors intelligently.
  • Increasing legislation & regulation. Legislation and regulation are significant drivers of change. Environmental and social issues are becoming increasingly important to business and as such will increasingly impact investment returns. The challenge for advisers is to find funds that will benefit from these macro trends that have all the other standard investment attributes that are suit their clients’ goals.


A 2007 directory of academic studies  focusing on the impact of integrating environmental, social and governance issues into investment analysis is available from UNEP FI (the United Nations Environment Programme – Finance Initiative).