Confusion over the make-up and goal of environmental funds could be dampening investor demand in what many see as a key global investment theme of the future. Poor performance in this area is also to blame for lacklustre interest.
However, some groups are trying to rejuvenate interest in this market with new launches and/or more detailed communication as to what their funds target. This month, Jupiter has moved the focus on all of its environmental funds to three clearly defined themes while Legal & General has entered the peer group with a passive environmental offering.
Climate change, sustainable or envir-onmental investing made headlines a few years ago but it has since gone a bit quiet. Their initial popularity – at least with the press – is simple enough to understand. It is an investment story that is very translatable into people’s everyday lives. After all, they are buying green products and recycling more today than ever before.
The global attention paid to climate change issues makes the overwhelming pressure on companies to reduce their carbon footprints something everyone can recognise and appreciate. The high commodity prices and Middle East tensions of recent months also make it easy to grasp the need for energy security these days.
From an understanding of these fundamental drivers, clients can see the potential for investment returns. Yet many advisers note there remains a lack of interest. Maybe it has to do with the fact that since the wave of fund launches in this area years ago, many of the global, broad-based funds have not wowed in performance terms.
Over three years to June 10, it appears the best-performing environmentally focused fund returned just over 12 per cent bid to bid. This is a higher return than the global peer group average of 9.46 per cent, ranking 71 out of 233 funds – solid but hardly attention-grabbing.
However, a better argument is likely that people just do not get what these funds invest in. They may understand the concept but what do they actually do? For one, a sustainable fund may not be what they deem to be environmental while the latter may not be ethical enough and climate change may be neither.
Best Invest senior investment adviser Adrian Lowcock says: “There is obviously an element of crossover in the underlying companies but each still needs to be more clearly defined.”
Hargreaves Lansdown investment manager Ben Yearsley says it is difficult for investors to get clarity. He says: “For instance, you may find nuclear companies in one fund, as some managers consider it clean energy, whereas for others it is unethical. There is no definition in this area – that is half the problem.”
It may also explain why broad-based portfolios have attracted relatively smaller amounts of assets compared with environmental sub-sector funds. For instance, funds such as Jupiter climate change solutions, Schroder global climate change, Aviva sustainable future global growth, Hendersons’ industries of the future and Allianz’s global ecotrends are all below £150m in size. Jupiter ecology is perhaps one of the biggest in this sub-set at £408m.
Still, it does not compare to some of the giant, more specialist environ-mentally focused portfolios. For example, Schroder agriculture exceeds $1bn in assets, Blackrock’s new energy fund is almost $3bn in size while Pictet’s water fund is closing in on £2bn.
On this basis, it appears as if broad-based environmental funds are too specialist for some and yet are not quite specialist enough.
Addressing this issue may be why some groups are attempting to provide greater clarification in their remits, highlighting aspects to show that perhaps these funds should not be considered specialist at all. Many may consider the environmental arena to be all about new technology or alternative energy companies dealing in the likes of solar power.
However, groups such as L&G, Jupiter and Schroders argue energy efficiency is one of the biggest themes in this market and that does not necessarily involve technology at all. Instead, they argue that the backing themes to their respective funds offer exposure to a fundamental and undeniable shift in the way the world operates.
At the beginning of June, Jupiter redefined the themes each of its four environmental portfolios covers. Previously, the funds looked at companies that could be classified as clean energy, water management, waste management, sustainable living, environmental services and green transport. Today, the group is investing in three main areas (to which some of the previous six will still fall) – infrastructure, resource efficiency and demographics.
Jupiter head of environmental investment Charlie Thomas believes the new categories better reflect the way environmental issues will become embedded in mainstream economic activity in future years.
Thomas says: “Investment in envir-onmental solutions businesses is no longer a niche enterprise but is rather about investment in the long-term structural growth of the global economy. Demands of an increasing global population on the world’s finite resources, for example, are likely to make environmental solutions businesses ever more fundamental to sustainable economic growth.”
Legal & General’s innovative global environmental enterprises fund, a passive mandate, also argues that the shift in world dynamics is changing the face of companies. The fund aims to provide capital growth primarily through investment in companies profiting from the global response to energy scarcity, pressures on natural resources and the shift to a lower carbon world economy.
Legal & General Investments managing director Simon Ellis says: “Across the world, companies are delivering growth and value in sectors such as low carbon energy production, energy efficiency, waste management and water use. These dynamic and rapidly growing markets create current annual revenues estimated at over $700bn, forecast to grow to $2.2tn by 2020.”
The argument of a themed investment tackling a shift in the way the world works is one we have all obviously heard before – technology and biotech obviously spring to mind. But then so too does global investing and emerging markets.