Responsible Investment (RI) tilted Australian equity funds tracked the index during the September quarter, according to the most recent update from the Evergreen Responsible Investment Grading (ERIG) Index. 

However, the results also shows that highly rated responsible investment managers continue to struggle with volatile market conditions that have seen energy and materials stocks out-perform. 

This is a change from previous cycles, where RI managers clearly out-performed the benchmark and are now performing in line with the index. 

Evergreen Consultants investment consultant Maximilian Mulholland-Licht said an important issue underlying recent performance is that RI in Australia is still relatively new and there is a lack of depth in the stocks available to RI managers, particularly those who favour purely negative screening approaches when compared to others who focus on active ownership, engagement and advocacy. 

“This means managers who apply negative screens are being forced into stocks that are under-performing,” she said. 

Mulholland-Licht took a deeper dive into the September quarter numbers to investigate the portfolio characteristics of RI managers. It found Australian equity managers with above-average ERIG scores have greater exposure to the growth style, quality factors, and smaller companies. 

A multi-factor regression-based style analysis was performed. Among the above-average managers, it found comparatively low correlations and biases to the value style and large-cap stocks. 

There were slight differences when global equity managers in the ERIG Index were analysed. 

“The bias towards growth and quality was more pronounced, while the below-average managers were more biased towards small caps,” Mulholland-Licht said. 

“It is important to understand the manager’s investment process. The better we understand that the better we can guide portfolio construction outcomes and build robust diversified portfolios when looking to incorporate Responsible Investment themes into investment decisions.” 

Evergreen’s view is that understanding a manager’s process is key to asset allocation and manager selection. 

ERIG Index ratings are based on seven RI capabilities and provide a score for each category.