Although critics of responsible investing (RI) say that the practice limits portfolio diversification and leads to lower returns and increased risk, mounting evidence reveals that the financial performance of RI mutual funds is, in most cases, better than traditional mutual funds.
In fact, a new academic study commissioned by Vancouver-based OceanRock Investments Inc. entitled Canadian RI Mutual Funds Risk/Return Characteristics validates those studies and goes a step further by evaluating the risk/return characteristics of Canadian RI mutual funds.
RI is the integration of environmental, social and governance (ESG) issues into the selection and management of investments. RI adherents make the claim that this will lower risk in portfolios. And as more and more of us reach retirement age, managing risk is becoming increasingly important, especially on the downside.
The study, described as the first study of its kind in Canada by its author, Tessa Hebb, director of the Carleton University Centre for Community Innovation, explored whether Canadian RI mutual funds can provide solid financial returns for investors while simultaneously reducing risk. Hebb and her team of researchers measured the risk and return characteristics of RI mutual funds against the average for Canadian mutual funds across eight common asset classes in Canada, including fixed-income and balanced funds.
The study’s findings related to risk metrics show that Canadian-based RI equity mutual funds outperformed similar non-RI equity funds on various risk measures 55% of the time, demonstrating the ability for RI mutual funds to reduce risk in investment portfolios.
RI mutual funds also showed stronger Sortino ratios than their non-RI industry benchmarks 72% of the time. A high Sortino ratio shows that there is a low probability of a large loss, demonstrating that RI funds provide better downside protection than traditional equity funds.
Furthermore, the study reveals that Canadian-based RI equity mutual funds outperform their industry benchmarks 63% of the time and provide better downside protection than their peers.
The results are not particularly surprising to the burgeoning RI community as RI assets under management grew by 68% to more than $1 trillion from $600 billion in the two years ended Dec. 31, 2013. One of the drivers of that growth is the recognition that issues such as climate change, aboriginal relations, executive compensation and supply chain management can affect the valuation of individual securities in an investment portfolio.
These results are similar to the findings in a recent U.S. study, says Hebb, noting that “it’s important to know that Canadian RI funds perform well while reducing risk for investors.”
“This study represents a breakthrough for the RI market and investors who prioritize capital preservation coupled with growth,” adds Gary Hawton, president of OceanRock Investments. “We have suspected that RI led to reduced risk and greater downside protection for investors but that notion has not been quantified until now.”
This represents good news for investors. According to a 2014 NEI Investments study compiled by Environics Research Group, 71% of Canadian investors want to make a difference, but 56% can’t figure out how RI helps. Now we know. The OceanRock study shows that you can help your clients achieve competitive returns, reduce their downside risk and make a difference. Risk matters.