You may be at the stage where you’ve decided to invest in an ethical fund – whether via your KiwiSaver scheme or as a separate investment. Now it’s time to choose between passive and actively managed funds.
First though, let’s define these investment terms
Ethical investing is a strategy that balances two primary investment objectives: aligning with the investor's personal values and achieving good returns.
Actively managed funds have a portfolio manager (or team), who uses their knowledge and expertise to try to beat the market’s average returns for the benefit of their investors.
Passive funds tend to follow a market index, such as the NZ50, and won’t have a management team making investment decisions. As returns reflect the index, they can never beat the market.
The benefits of actively managed ethical funds
Active participation of seasoned financial professionals, and the potential to gain benchmark-beating returns.
Active fund managers may adjust sector allocations, to adapt the fund to withstand or take advantage of changing market conditions. Actively managed funds can respond more quickly to unexpected global events and legislative changes than passive funds: by shifting allocations away from or into specific sectors, depending on their performance. It’s this flexibility and agility that can work in the investor’s favour – particularly during market downturns and increased volatility.
These factors apply to ethical funds too. An effective responsible investing approach adds deep, holistic analysis to exclusions and inclusions – designed to help produce long-term, solid results. This is where actively managed funds using an experienced fund manager have advantages over ‘DIY’ investing in an area that is constantly evolving.
Actively managed funds actively influence companies
As an investor in actively managed funds, you can benefit from your fund manager’s combination of influence and intel.
To make the most informed decisions, an actively managed fund analyses each company far more deeply than an equivalent passive fund. Active fund managers also exercise their voting power as large shareholders to shape a company’s direction, influencing it to consistently improve in ways that benefit stakeholders.
Management fees typically reflect the time and expertise of fund managers who actively screen to exclude non-ethical companies, and research new opportunities. That’s why it pays to compare fees with the fund returns, as higher performance could more than offset fee differences.
Experience is the difference
An experienced, dedicated fund manager with a responsible investment approach will:
- Dedicate time to research companies and understand ratings and other information to make responsible investment decisions
- Embed ESG/RI considerations into all investment decisions, and may also offer an SRI strategy that has specific exclusions
- Actively engage with and influence companies as a significant investor
- Have access to the latest information through continuous research, and be well-informed when making voting decisions
- Undertake ESG research directly for effective, up-to-date screening
- Integrate quality third party ESG research into the investment process.
What criteria do active fund managers look at?
These are the key environmental, social and governance (ESG) criteria used to evaluate companies the fund invests into:
Environment
- Publishes carbon or sustainability reports
- Limits harmful pollutants and chemicals
- Lowers greenhouse gas emissions
- Uses renewable energy sources
Social
- Operates ethical supply chains
- Protects staff against sexual misconduct
- Pays fair and equitable wages
- Is an upstanding part of its local community
Governance
- Ideally employs a CEO who’s independent of its board chair
- Has independent board members with relevant, diverse skills and experience
- Embraces corporate transparency and reporting
George Carter, the Managing Director of Nikko AM NZ believes the best screening is the result of active management. “As a global fund manager with a philosophy of embedding ESG considerations into all our investment decision-making, we have the benefit of real-time experience and understanding of global trends and legislative and social developments. We use this advantage to engage with the management and boards of local companies on behalf of our investors to help drive positive change.”
Introducing the Nikko AM SRI Fund
The Nikko AM Socially Responsible Investment Equity Fund aims to align with investors’ ethical values, while providing competitive returns.
The Fund is actively managed by a dedicated local SRI fund manager, supported by the Nikko AM NZ equities team, plus the ESG Global Steering Committee who assess, interpret and adjust exclusions criteria.
The fund, which holds 30-35 Australasian listed companies, has consistently outperformed the S&P/NZX50 Gross Index over the past 20 years, delivering an average annual gross return of 12.48%.
Our free guide will help you understand the basics of ethical and socially responsible investing.
