What are we looking for?
Investment funds to make an impact
The screen
As we approach the end of the year, many individuals reflect on the value of giving back. Whether through charitable donations, supporting sustainable businesses or volunteering time, the desire to contribute positively to society is often heightened during the holiday season. For investors, this is increasingly extending to portfolio choices, as an increasing number of mutual funds and ETFs offer compelling ways to align financial objectives with social and environmental impacts. Admittedly, the area is quite nebulous, given that each offering is often unique in its approach, as is each investor’s beliefs.
To this end, today I use Morningstar Direct to look specifically for mutual funds or ETFs that either invest substantially in green bonds (bonds whose proceeds are used by the borrower exclusively to finance green projects) or have a stated investment objective that includes measuring real-world impacts. For this search, I leaned heavily on the Canadian Investment Fund Standards Committee’s (www.cifsc.org) Responsible Investment Identification Framework, which identified five core sustainable investment approaches for funds in Canada. One of the approaches is impact investing, which aligns with the above intention and is used in today’s screen. Aside from this feature, I also screened for funds and ETFs that have received either:
- a four- or five-star Morningstar Rating for Funds (also known as the “star” rating), indicating that the fund has historically outperformed respective category peers after fees, on a risk-adjusted basis. Our data show that although the star ratings are backwards-looking, funds that have received five stars as a group outperform those that have received four stars, three stars, etc. in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future.
- a Morningstar Medalist Rating of gold, silver or bronze, highlighting funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision making).
Only the oldest share class of funds was considered in the search. I note importantly here that the “impact” feature of these funds does not affect their rating peer group. In other words, impact funds in a particular category are compared against all others in the category regardless of whether they have the feature or not. Inherently through this search we are looking for funds that do not necessarily give up financial returns for societal gains.
What we found
The funds that met the above requirements are listed in the table accompanying this article inclusive of their asset classes, tickers, MERs, ratings, inception dates, trailing performance and average manager tenure (noting that two of the index-based ETFs do not have named portfolio managers given their nature).
This article does not constitute financial advice. It is always recommended to conduct one’s own independent research before buying or selling any of the funds mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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