This week has been all about ESG at Morningstar.co.uk, with topics including, biodiversity, stranded assets and green pensions. But what about sustainable funds that are available to UK investors? Today we look the funds that are highly rated by Morningstar analysts and have a a high Sustainability Rating. We’ve screened the thousands of UK funds covered by Morningstar and narrowed these down to funds with a 4 Globes and above, which means they are all outperformers on sustainable issues.
Just over 50 funds make the grade and they come from a wide range of equity fund categories, including UK Equity Income, Global Emerging Markets and India Equity. Most are equity funds, but there are also a handful of allocation funds – and one fixed income fund, Bronze-rated M&G Strategic Corporate Bond, which has 4 globes. A handful of fund management groups also dominate the list and they JPMorgan (six funds), Liontrust (six funds), and Fidelity (five). Stewart Investors and Liontrust dominate the list of funds with 5 globes, and all of the 5-globe funds have an Analyst Rating of Bronze or Above.
Only one fund has 5 Globes and has an ESG Commitment Level of Advanced, and that is Silver-rated Stewart Investors Global Emerging Markets Sustainability. Morningstar analyst Christopher Franz says the fund’s returns since inception have been strong and it is a compelling option for sustainably focused emerging markets investors. The fund team, led by Jack Nelson, focuses in particular on investing in family-owned businesses alongside founders wherever possible. “Of paramount interest … is management stewardship: the team requires management teams that act with integrity, are long-term-oriented, and demonstrate an ability to manage risk effectively,” Franz says. Top holdings, as at September 30, include India’s Housing Development Finance (HDFC) and Tata Consultancy (TCS), as well as former stock of the week and emerging market favourite Taiwan Semiconductor, whose shares are up 30% over one year.
Globe Ratings Explained
Morningstar’s globe ratings are just one tool that can help investors work out a fund’s ESG credentials. A 5 globe rating indicates a fund is at the top end of its peer group in terms of sustainability, while a 1 globe rating shows it is underperforming on sustainability issues. The Morningstar Sustainability Rating helps investors evaluate funds based on the sustainability profile of their underlying holdings. The globe ratings are a measure of how well a fund’s holdings are managing their ESG Risks relative to the fund’s peer group.
The rating, powered by Morningstar company Sustainalytics, ranges from 1 to 5, with 1 globe indicating a Low score, 2 as Below Average, 3 for Average, 4 as Above Average, and 5 indicating a High Sustainability Rating for a fund in comparison to its peer group.
On top of the well-established globe ratings, Morningstar has also launched an enhanced risk rating system known as the ESG Commitment Level which has a range of gradings, from Low to Leader, with Basic and Advanced in between. This rating applies to both the fund strategy and the asset manager, so the ratings can be mixed: a fund manager can be rated a “Basic” under the commitment level but one of its funds can be rated as “Advanced”. Of the 52 funds with 4 globes and above, 12 are rated with the additional ESG Commitment Level. Only Stewart Investors is rated as Leader on a company and fund level, for the Global Emerging Markets Sustainability fund and Asia Pacific Sustainability fund – which are rated Silver and Gold respectively. The Stewart Investors Asia Pacific fund is as close as possible to a clean sweep of the highest Analyst Rating (Gold), Sustainable Rating (5 globes) and ESG Commitment Level (Leader).
Within this elite group, Royal London Sustainable Leaders is the standout in terms of performance in 2021 (15.78%) and over five years (an annualised return of nearly 11%). The fund, which has a Bronze and Silver Analyst Rating depending on the share class, has beaten its Morningstar category (UK Large-Cap Equity) and benchmark (FTSE All Share Total Return) over five consecutive years. Manager Mike Fox has been in charge of the strategy since 2003, which makes him one of the longest service managers in the UK sustainable fund space. “Royal London Sustainable Leaders Trust remains a strong choice for those seeking a sustainability strategy within UK equities. The investment process is disciplined, has a longer-term outlook, and has been executed well over the manager’s lengthy tenure,” says Morningstar analyst Samuel Meakin. The fund has an impact and, in world where ESG stocks are richly rated, a value focus, Meakin explains. “The strategy’s aim is to invest in companies that deliver a net benefit to society in terms of the products and services they provide or that show leadership in environmental, social, and governance management. In addition, Fox seeks to identify businesses where he believes the longer-term growth prospects are underappreciated by the market.”
Only five highly sustainable funds have a Morningstar Analyst Rating of Gold. Fundsmith Equity is the best performer in this group of Gold-rated funds, with its 16% annualised gains over five years putting it ahead of the pack. While it has a 4- globe rating, it is ranked as a laggard in terms of its ESG Commitment Level. But it is not the best performer within the wider group: that honour goes to Liontrust Sustainable Future Managed, which has returned over 18% on an annualised basis over five years.