Cerulli Global Edge, April 2009

In markets like these it is difficult to get anyone to focus on corporate and social responsibility in investment. It’s hard enough to stay afloat at all. But longer term trends show that there may be opportunities for international SRI-focused fund managers in Australia.

To see why, it is useful to look at three indicators: flows, performance and the state of the local industry. The increasing availability of credible local data is making these things much easier to assess.

A group called Corporate Monitor launched a benchmark report on responsible investment in Australia and New Zealand in November, and among other things it addressed flow data. On the face of it, this looks bad: in the 2007-8 financial year (which in Australia means to June 30) the total managed responsible investment portfolios fell 7%, from $16.95 billion to $15.73 billion. Almost all of it was a consequence of negative investment performance, and while net flows to existing managed portfolios were a negative $147 million, they were almost offset by $134 million entering newly launched ethical funds.

While June 30 is already a long time ago, and flow figures will no doubt have deteriorated since then, it is interesting that those figures already look notably better than those in conventional finance. While ethical assets were falling 7%, overall retail mutual fund assets fell $11.9 billion, or 9.9%, over the same period, and wholesale funds by $7.9 billion, or 13.9%, according to Australian data provider Plan for Life. So in flow terms, it’s clear that ethical funds have been more than holding their own in Australia.

If assets are holding up better than the herd, how about performance? Here, the picture varies. Data from Mercer Investment Consulting to January 31 shows that the median SRI Australian shares fund, when compared to the median long-only fund, underperformed over three months, outperformed over a year, and under for three years, in all cases with the SRI and conventional medians being within a percentage point of each other: so keeping pace with the mainstream, and certainly offering no indication that SRI principles automatically undermine performance. International SRI funds offered from Australia show a similarly scattered but close pattern, with SRI funds ahead over one and five years, and mainstream funds ahead over three months and three years.

SRI managers will never stop having to fight the perception that screening stocks out of an investment universe necessarily impedes performance, but data like this is helpful in demonstrating that it is not demonstrably true. By the same token, the argument advanced by SRI managers – that screening out unethical companies is in itself prudent investment practice and should in the long term generate better returns – is equally difficult to prove. Still, the performance argument is less frequently raised against Australian SRI managers than it used to be.

More than anything, the sophistication of the local industry shows how entrenched SRI-related styles of investment have become. SRI funds are not just offered by dedicated boutiques (such as Glebe Asset Management, which until recently offered publicly its funds which are primarily run on assets of the Anglican Church Diocese of Sydney, or UCA Funds Management, an arm of the Uniting Church of Victoria) but by most of the biggest names in Australian funds management: AMP, BT, Ausbil Dexia. Even Colonial First State, which offers no funds specifically marketed as SRI, is a signatory to the United Nations Principles for Responsible Investment (as are 64 other Australian groups) and the Carbon Disclosure Project. And, in a further display of sophistication, it’s not just the commercial fund managers who are adopting these investment approaches: superannuation funds like VicSuper, Christian Super and Local Government Super Services are all using these techniques on at least some assets and investment options; while community finance funds grew 27% in assets in 2007-8 to $863 million, according to the Corporate Monitor survey.

Rates of growth, the last year notwithstanding, are very high: $15.73 billion today compares with $325 million in 2000. At June 30 2008 (the relevant date for the Corporate Monitor study) Morningstar put the total investment managed industry in Australia at $828.9 billion, meaning responsible investment accounts for 1.9% of the industry: not a huge amount, but broadly similar to the USA, although the definitions one uses for social responsibility naturally have a big impact on these figures. The trend is for greater penetration of the overall investment management industry, and it should also be pointed out that the overall drivers of investment assets in Australia are strikingly robust: an economy that has been growing without interruption for well over a decade and might still escape recession even in this environment; growing wealth; a sophisticated retirement savings system; and, most of all, compulsory superannuation (pension contributions) of 9% of every Australian’s salary, all into super funds who historically have invested at least half of their assets into equities.

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