3 newly rated funds for ESG portfolios

Annika Bradley  |   15th Sep 2022  |   6 min read

Given Morningstar’s independent model, our goal is to cover a broad spectrum of strategies that meets our investors’ portfolio construction needs, and we know that clients are increasingly seeking environmental, social, and governance investments. As such, we’ve recently added three new funds to our coverage to provide some additional options for advisers constructing ESG portfolios for clients. We’ve provided detail on the investment merits of the strategy and also noted the Morningstar ESG Commitment Level, or ECL, for asset managers. The ECL expresses our analysts’ qualitative assessment of how asset managers incorporate ESG factors into their investment processes. It follows a four-tier scale: Leader, Advanced, Basic, and Low.

ESG Sustainable Fund Availability and Increased Coverage

There are currently 178 Australasia-domiciled sustainable funds. We recognise the importance of evolving our research and coverage universe to meet growth trends and client expectations. We recently initiated coverage on Pendal Sustainable Australian Fixed Interest (Category: Bonds Australia); Bell Global Emerging Companies (Category: Equity World Mid-Small); and Stewart Investors Global Emerging Markets Leaders (Category: Equity Emerging Markets). Each of these strategies are classified in Morningstar Direct as Sustainable Investments and could be considered for investors looking to construct an ESG-centric portfolio.


Pendal Sustainable Australian Fixed Interest (APIR Code: BTA0507AU; Ticker: 42184)

Morningstar Category:™ Bonds – Australia

Neutral rating

ESG Commitment Level, Asset Manager: Basic

Pendal Sustainable Australian Fixed Interest is an acceptable strategy to gain access to a portfolio of ESG-focused bonds. However, its duration management and team changes across the broader group make us cautious. George Bishay is the lead portfolio manager here and has been since the strategy’s inception, with Tim Hext providing support. While the two display decent insights within their respective fields and have credible experience, there have been significant changes to the fund overall.

Notably, this team has been in place since October 2021, after Pendal parted ways with credit manager Justin Davey and established an alternative duration business managed by former fixed-interest head Vimal Gor and four colleagues. (Gor’s alternative duration business will be shut down in late 2022.) Gor had been instrumental in developing and overseeing the fixed-income capability, and therefore a period of team stability was critical.

The strategy invests in domestic government, semi-government, and credit securities, with an active tilt to green, social, and sustainable bonds. A combination of in-house and third-party ESG data and research is used for positive and negative screening, investable universe creation, and issuer assessment. Still, Pendal has been able to find distinguished and strong-performing opportunities in certain sectors such as infrastructure and utilities. Credit has historically been the main driver of returns and made up 36% of the portfolio as of January 2022. Duration can range between plus or minus 2.0 years relative to the Bloomberg AusBond Composite Index, so there’s some scope to profit from interest-rate regime changes. That said, active duration has been kept within a fairly narrow range of plus or minus 1.0 year relative to the index from inception to December 2021. Thus, an unexpected rise in interest rates and/or widening of credit spreads could hinder. The annual fee of 0.40% is competitive against peers. Pendal Sustainable Australasia Fixed Interest is a sufficient offering for fixed-interest ESG exposure, but there are shortcomings.

Bell Global Emerging Companies (APIR Code: BPF0029AU; Ticker: 19696)

Morningstar Category:™ Equity World Mid/Small

Silver rating 

ESG Commitment Level, Asset Manager: Basic

Bell Global Emerging Companies is a standout option among active managers within the equity world mid-small Morningstar Category. The strategy defines its universe as the bottom 28% of the MSCI World Index, giving it the flexibility to own companies in a broader market-cap range than typical peers. Companies must be at least USD 1 billion in size for portfolio inclusion, but the average market cap as of 28 February 2022, was AUD 19.587 billion compared with the category average of AUD 9.663 billion.

The strategy is effectively a subset of the flagship Bell Global Equities, which is an all-cap mandate. Bell has strict quality thresholds that require companies to deliver at least 15% return on equity. Companies that fail to achieve this over three years are weeded out. ESG exclusions for tobacco and controversial weapons, and reduced exposures linked to revenue thresholds for fossil fuels, uranium, cluster munitions, gambling, and pornography occur at this point also, after which the team fundamentally assesses management quality and governance. They also consider fundamental factors and aim to provide a portfolio with better-than-benchmark ESG attributes and lower-than-benchmark carbon intensity. Only around 150 names meet the manager’s strict criteria, and from that a moderately concentrated portfolio of 35-55 stocks are selected on the basis of attractive relative valuation and diversification. There are some consistent portfolio biases: healthcare, technology, and consumer names are favoured; financials, energy, and utilities are not.

Portfolio managers Ned Bell and Adrian Martuccio have a long and successful track record managing global equities for institutional investors. Bell launched its flagship all-cap global strategy in 2003 and was joined by Martuccio in 2007. Over time they have built up a team of experienced analysts with a strong performance-driven culture. Bell Asset Management is a profitable boutique that is majority staff-owned, while the founding Bell Group Holdings maintains around a 40% interest. This promotes team alignment and stability. Overall, Bell Global Emerging Companies fund is an excellent option for global small- and mid-caps equities exposure.


Stewart Investors Global Emerging Markets Leaders Sustainability (APIR Code: PIM1937AU; Ticker: 44359)

Morningstar Category:™ Equity Emerging Markets

Silver rating 

ESG Commitment Level, Asset Manager: Leader

Stewart Investors Global Emerging Markets Leaders Sustainability strategy is a strong option within the emerging-markets category, given a best-in-class investment approach, executed by a capable investment team. Launched in September 2021, the strategy is the larger-cap sibling to the existing all-cap strategy managed by the Stewart Investors Sustainable Funds Group. The team is in the process of taking over a similar “leaders” strategy that was run by the St Andrews Partners arm of Stewart. First Sentier Investors decided to wind down the STAP team in early 2022, to enable greater product focus.

Jack Nelson is the lead portfolio manager and is backed by a strong supporting cast, including the highly experienced David Gait. While the closure of STAP is an incremental loss, given the two teams had the ability to share research, the SFG team has exhibited a high degree of stability and has deep expertise across the emerging markets, especially within the Asia-Pacific region. The strategy’s benchmark-agnostic approach is well-codified and robust. For this Leaders strategy, Nelson seeks 25-60 stocks capable of delivering sustainable and predictable growth through pricing power, franchise strength, and management integrity. The group tries to invest alongside founders in family owned businesses where possible. The team homes in on firms whose revenues are less likely to be impacted during economic downturns, which has historically been a preference for consumer staples. Conversely, given its mandate, which focuses on companies that contribute to and benefit from sustainable development, investors should expect the portfolio’s energy and materials stakes to be limited. Lower-than-average volatility and strong downside protection are hallmarks of SFG’s approach, which are appealing features within the emerging-markets category. Overall, this makes Stewart Investors Global Emerging Markets Leaders Sustainability a strong option.

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