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ESG takes on total return: the managers driving the trend

ESG takes on total return: the managers driving the trend

Momentum is building for SRI (socially responsible investing).

The most recent report from the Global Sustainable Investment Alliance, released last year, highlights assets in the global sustainable investment market grew 61% between 2012 and 2014, from $13.3 trillion to $21.4 trillion.

The surge suggests such strategies are holding their own at a particularly tough time for investors, many of whom agree ESG impacts are desirable, but take second place behind the need for returns.

A further indication of how these investments are measuring up to more mainstream rivals is their move into the absolute returns market.

So can such strategies really walk the walk? C-Quadrat’s Andreas Böger, who runs several funds at the Austrian-based asset management firm, including the C-Quadrat Absolute Return ESG fund, is one manager taking on the challenge. 

The fund, launched in November 2000, has been an absolute return strategy since 2003. However, Böger said the strategy has been further overhauled in the past few years.

‘We changed the format to ESG at the end of 2014, mainly due to investor demand, and the market was conducive to this strategy. We wanted to switch more and more products to responsible and sustainable investing.’

Böger dismissed claims from investors who believe this sort of strategy cannot work due to strict criteria and said, on the contrary, this type of fund is key in protecting investors.

‘The chances of outsized losses are reduced because we don’t use any complicated models. We have less danger of a blow-up, which we have seen, for example, in market-neutral strategies in the past.’

‘People who say you cannot have absolute return with ESG would have to explain their reasoning to me. Essentially, you are reducing your investment universe, but you are not restricting the amount of asset classes or the management strategy you can implement.'

‘We think people that believe these two factors are not compatible are using strategies that are too complicated, or they are restricted by their use of derivatives or cannot control the issuers by investing mainly in sub-funds.’

Ultimately, the numbers have to do the talking. It is early days for Böger’s fund but so far the signs are good. The C-Quadrat Absolute Return ESG strategy gained 1.7% in the 12 months to 31 July 2016, compared with a loss of 1.6% from the average fund in Mixed Assets Absolute Return EUR sector. This places it 20th out of 100 funds.

A nuanced approach

Another way of accentuating the positive when it comes to ESG investing is to take a flexible approach. Kommer van Trigt, head of Robeco’s global fixed income macro team, and manager of the Robeco Global Total Return Bond fund, said the key message when building ESG into a portfolio is that it doesn’t have to be one or the other.

Van Trigt said despite having an ESG element within his fund, this does not mean that every investment decision is driven by these considerations.

‘Whenever we choose which bonds to buy from which companies and countries, this is where that knowledge about how these businesses and regions function at an ESG level is beneficial.'

'That’s not to say we will never invest in companies that are doing poorly in this dimension, but we need to know about it so we can get a decent compensation for it.’

On the flip side van Trigt said there is often real value to be added by following a more socially responsible approach.

‘Some market participants assume integrating ESG criteria into the research comes at a cost, they think it is harmful to returns, whereas we believe it can add to returns in the long term.’

‘It can prevent investors from allocating to countries like the Ukraine, for example, which has corruption issues. In this sense it would be beneficial to risk-adjusted returns rather than coming at a cost.’

Elsewhere, BlackRock has recently launched the BlackRock BSF Sustainable Euro Bond fund, to be run by Citywire A-rated Michael Krautzberger, who said mixing absolute return and ESG is not uncompetitive, and exacting remits are the same regardless of SRI criteria.

‘An absolute return fund with a demanding return target is a challenge for every fund manager. There might be years when you don’t achieve your goal, so having a few additional considerations for the performance target is, therefore, useful.’

‘For a total return fund with an ESG overlay, all of the macro-type trades could be the same as a fund without an investment criteria. The investment process could arguably be more complex and a fund like this might only do a certain percentage of the trades other funds could do due to some securities being ruled out through the ESG screening process.’

‘This, however, does not mean the two factors are incompatible, it’s about setting wide expectations and communicating that the risk might be higher, but there would be no problem running this sort of product.’

This article originally appeared in the October edition of the Citywire Selector magazine.

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