Investors love the idea of helping the world out with their investing dollars. That has made selling ESG funds easy for the world’s largest asset managers. They love pitching their funds as a way to “save the world,” while quietly charging high management fees. But according to the Wall Street Journal, investors are beginning to notice something. Despite their desire to save the world, they still want to make money from their investments, and that’s not always happening with ESG funds. Cheryl Winokur Munk reports:
A notable 47% of respondents in the Schroders 2020 Global Investor Study say they are attracted to sustainable investments because of their environmental impact, while another 42% base their attraction to sustainable funds on the likelihood they will provide higher returns.
Whether values-based investing actually pays off, however, is a matter of debate. Last year, U.S. sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points, while U.S. sustainable bond funds outperformed their traditional peer funds by a median total return of 0.9 percentage point, according to a report from the Morgan Stanley Institute for Sustainable Investing.
But that isn’t the whole story. Meir Statman, professor of finance at Santa Clara University in California, says socially responsible funds tend to have higher annual fees, so their returns are likely to lag behind over time.
“Short-run realized returns are noisy because of luck or other circumstances, sometimes favoring ESG investors and sometimes favoring non-ESG ones,” Dr. Statman says. “Each tends to crow when returns favor them. The logic of fees, however, suggests that, in the long run, ESG investors are likely to earn lower after-fee returns than non-ESG investors,” he says.
Dr. Statman advises ESG investors to see how their particular ESG fund stacks up over time against a low-cost index fund of the same category. He offers the example of the Vanguard FTSE Social Index Fund, categorized by Vanguard as a large growth fund. It had an annualized return between May 31, 2000, and June 17, 2021, of 6.73%, compared with 7.67% for the Vanguard Growth Index Fund, also a large growth fund, over the same period.
A look at costs shows that the average annual expense ratio of sustainable ETFs that invest in U.S. stocks is 0.33% versus 0.09% for U.S. equity ETFs in the cheapest quintile by fee, according to Morningstar Direct, an investment-research platform.
Action Line: Don’t let the big egos of money managers dictate how your hard-earned savings are invested. Look for a manager who is a prudent guardian of your wealth who honors their fiduciary duty to you.
