The majority of environmental, social and governance (ESG) products come from new launches but some global players are employing a sleight of hand to cash on the trend towards socially-responsible investing.
JP Morgan and UBS are among banks that have transitioned existing products that are struggling to attract new assets into funds with an ESG approach.
For example, in November 2016 the JP Morgan Intrepid Advantage fund, launched in 2003, transitioned into the Intrepid Sustainable Equity fund, while the UBS US Large Cap Equity fund became the US Sustainable Equity fund in October last year, 23 years after it first launched in 1994. Other funds have maintained their name, but have stated they are adopting an ESG approach in their prospectus.
Franklin Templeton this week became the latest asset manager to jump on the bandwagon, stating the newly-renamed Templeton Global Climate Change fund, which is registered in Luxembourg, will invest in “attractively valued companies preparing for the transition to a lower carbon economy”. The fund used to be known as the Templeton Global (Euro) fund before the changes came into effect on 5 March.
Maarten Bloemen, based in Canada, will co-manage the fund with London-based Dylan Ball. They will be supported by a dedicated climate change analyst Craig Cameron and ESG specialist Don Graham. Director of research and portfolio manager Heather Arnold will serve as a back-up manager.
Morningstar head of passives for Europe, Hortense Bioy, said despite the trend of funds being repurposed, it was unique that Franklin Templeton was repositioning its fund from a global equities fund to a thematic climate change fund.
“It’s like a new fund,” Bioy said.
“It’s one thing to add ESG criteria, but it’s another just to select the best in class. You need the expertise for that,” she added.
Bloemen, who holds a master’s in environmental studies, leads the sustainable investing efforts within the Templeton Global Equity Group, where he has joint research responsibilities for renewable energy. The portfolio team is also supported by Franklin Templeton’s centralised ESG team.
Fourth-year of outflows
Franklin Templeton told our sister publication Portfolio Adviser, that the repositioned holdings will be available when the next factsheet is published, making comparison between the old and the new strategies difficult. Microsoft, Samsung and JP Morgan were the three largest holdings before the fund change, according to the January factsheet.
The fund will invest in three themes: companies remediating the impacts of climate change, such as renewable energy; companies with business models resilient to a lower-carbon economy; and companies in higher carbon industries that are focused on reducing their carbon footprint.
While Franklin Templeton denied the fund changes were due to outflows and were instead a response to retail and institutional client demand, Morningstar data shows the pre-existing €703m global equities fund had suffered outflows almost every month over the last four years.
It also underperformed its benchmark over one, three and five years with its January factsheet showing it returning 6.7%, 13.8% and 65.1% respectively over those periods, compared to 11.2%, 29% and 88.7% in the euro-denominated MSCI All World Country index.
Bioy said the pre-existing Templeton Global (Euro) fund had a slight value tilt, but not enough to explain recent underperformance.
In 2017, 17 funds repurposed themselves as ESG funds, according to a Morningstar report focused on US-domiciled funds. Since December 2015, 23 funds have transitioned into a responsible investment strategy, with eight rebranding the fund name to include ESG or sustainable.
The repositioning is the first of its type from Franklin Templeton. “We have no future plans to share at this stage but will look at opportunities where they are warranted,” a spokesperson told Portfolio Adviser.
Whitechurch investment manager and head of direct equity Amanda Tovey said some asset managers launch sister funds as an ethical alternative to existing products. She listed the Unicorn UK Ethical Income and Trojan Ethical Income funds as examples.
The £3bn Trojan Income fund dwarfs its ethical sister fund, which was launched in January 2016 and has £72.1m assets under management, but it has underperformed over a one-year period, returning -5% compared to -0.3% in the Trojan Ethical Income fund.
In contrast, the £15.9m Unicorn UK Ethical Income fund has underperformed the £669.5m Unicorn UK Income fund over a one-year period, returning 6.9% compared to the original fund’s 8.8%. But both funds outperformed the UK Equity Income sector, which returned 1.2%, and both were top quartile.
Bioy said it was too early to determine the performance and flows impact of funds repositioning to an ESG strategy, because the trend is so recent. “The repurposed funds may be very different: you might have light ESG screens or an outcome-based approach or, like the Franklin Templeton one, a thematic fund.”
Tovey described the move from a general global fund to a thematic fund focusing on climate change and using ESG stock screening as “quite a big fund repositioning”.
“Given this move from a general global fund to a thematic global fund focusing on climate change existing investors need to consider if they want thematic exposure to this area within their portfolios.”
Bioy agreed, adding investors may already hold funds with overlaps that have similar objectives, while others won’t have any interest in a climate change fund.
“They’re probably trying to target different types of investors. It’s a totally different mandate,” she said.
The fund uses a value investing approach combined with in-house climate change research. Franklin Templeton said it uses an “economic” rather than a values-based ESG screen, which is used by all portfolios managed by the global equity group.
Bloemen said the firm believed companies that exhibited superior practices in identifying and preparing for climate change should have a long term competitive advantage over industry peers.
According to Sarasin and Partners Compendium of Investment 2018 report, the growth of the UN’s Principles for Responsible Investment (PRI) reached almost $70trn in assets under management in 2017 from more than 1,750 signatories in 50 countries. The report said this demonstrated the rapid spread of the concept of ESG integration.