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SRI criteria no substitute to solid fund management processes, says Fitch

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Fitch Ratings says investors should not neglect, as for any equity fund, the quality of socially responsible investment’s investment processes, notably reactivity, focus on strategic stock research and active risk management.



As SRI has recently developed, investors have focused their attention mainly on new environmental, social, and corporate governance criteria and their reporting.

Yet, SRI is no protection to poor or average investment processes and Fitch highlights that SRI in itself has not improved the average risk/return profile of a European equity fund in the recent past.

Even on a longer term basis, including 2008, downside protection is not statistically proven. By contrast, European SRI bond funds have delivered better returns with lower risk in the past three years.

While exhibiting similar total expense ratios, SRI funds have on average underperformed non SRI funds by 0.6 per cent annually over the past three years in the European and eurozone equity Lipper categories.

Market participants often view SRI as a lower risk and more defensive stock picking strategy. This has not been confirmed in the past three years as SRI funds have exhibited slightly higher volatility and drawdown, respectively 19.5 per cent and -23.2 per cent, vs. 18.8 per cent and -21.7 per cent for non SRI funds.

Fitch nevertheless acknowledges that investors who adopt SRI also consider non-performance related benefits, such as carbon footprint or social impact of their investments.

Conversely, SRI filters have statistically added value in euro bond fund categories (excluding pure corporate funds), with 0.2 per cent annualised outperformance and lower volatility and drawdowns for SRI funds relative to non SRI vehicles.

When applied to bond funds, SRI criteria reinforce fundamental biases and have resulted in greater deviation relative to debt-weighted indices, notably on peripheral sovereign and bank debt. At the frontier with SRI, Fitch sees growing investors’ interest for fundamental approaches to bond fund management, away from conventional debt-weighted indices.

SRI funds have been a quite popular segment in the past five years. Currently, 7.5 per cent of the 1,900 European equity funds claim to follow an SRI approach. SRI is newer in bond funds, with 5 per cent of the 1,200 European bond fund universe. As at April 2012, according to Lipper data, SRI assets under management in Europe reached EUR121bn across 1,071 funds, mostly distributed in France, UK and Switzerland.

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