Managed funds with a heavy focus on the environment, social and corporate governance (ESG) outperformed the overall market, showing that having an ESG focus can boost investment performance.
But the effect was much stronger for international equities managed funds than for Australian equities managed funds, revealed Rainmaker Information's Wholesale Advantage Report.
In the report, Rainmaker found that for the period ending November 2021, the international equities managed funds sector, ESG managed funds outperformed by 3.2% p.a. over 12 months, 1.9% p.a. over three years and 1.6% p.a. over five years.
For the Australian equities managed funds sector, the effect was still positive but weaker as they outperformed by only 0.2% p.a. over 12 months, 0.8% p.a. over three years and 0.4% p.a. over five years.
"The ESG sector is often treated as a de facto sector as if it was its own asset class. But in reality, most ESG managed funds are equities funds," said Alex Dunnin, executive director of research and compliance at Rainmaker Information.
Rainmaker's managed funds performance survey tracks 66 ESG funds that collectively hold $19 billion in funds under management (FUM).
Among these funds, 57 of the 66 ESG funds, are equities funds. They make up 86% of the sample and 88% of its FUM.
These ESG equities funds include 22 that are Australian equities funds and 35 that are international equities funds.
"But the 64% of these funds that are international hold only 40% of their FUM, meaning they tend to be smaller."
Over the medium term, the ESG outperformance premium for managed funds in international equities were two to four times more than for Australian equities.
These outperformance results do not take account of investment style, scale, fees or product structure.
"The key strategic point is that over these time periods, there is robust evidence that choosing ESG investment strategies in no way detracts from performance. Indeed, it is likely to boost it."
"Being ESG in itself cannot make a managed fund superior. But if a superior investment manager runs an ESG fund it is very likely that fund will also be superior."
"That is, only good investment managers can run good ESG funds. Claiming to be ESG does not compensate for low quality investment expertise," said Dunnin.