Photographer: Andrey Rudakov/Bloomberg

Avoiding Coal and Cigarettes Doubled This Fund's Market Returns

  • Australian Ethical main fund returns 10.9% a year since 1994
  • Asia-Pacific is tiny slice of sustainable investing market

David Macri has a rebuttal to naysayers of ethical investing: two decades of returns that are more than double the Australian equity market.

The main fund at Australian Ethical Investment Ltd. has returned an average of 10.9 percent a year since 1994, and inflows have doubled the size of the Sydney-based money manager in just three years. Buying shares in Australian Ethical itself has also been a profitable trade; it’s up 45 percent in 2016.

The fund’s growth adds to signs that more investors, particularly younger retirement savers, are prepared to direct their cash away from so-called vice stocks and toward companies that rank higher on sustainability grounds. Convincing others that this is a sound strategy is still a stretch: by ruling out industries and ascribing a value to factors beyond financial metrics, ethical funds face criticism for risking lower returns and higher volatility.

“You’ve got to keep saying it and perhaps after the hundredth time, you might get some traction,” Macri, the 41-year-old chief investment officer at Australian Ethical, said in an interview in Sydney. “It’s great when you’ve got the results in front of you. You just show them the numbers.”

Macri’s Australian Ethical Australian Shares Trust fund, managed by Andy Gracey, climbed 18 percent in the past year, beating 90 percent of Australian domestic-equity peers, and topping 95 percent of rivals over five years, according to data compiled by Bloomberg. It’s annual average return since 1994 is more than double the 4.7 percent each year on the S&P/ASX 200 Index, the nation’s key stock gauge, the data show.

In Australia, assets at funds that involve a screening process to weed out firms grew by 16 percent to A$24 billion ($18.3 billion) in the past year, according to the Responsible Investment Association Australasia, whose members oversee A$1 trillion. The nation is home to the world’s fourth-largest pension pool.

Shares in Australian Ethical Investment fell 1.1 percent in Sydney on Thursday, while the S&P/ASX 200 Index gained 0.6 percent.

“The ethical space, which we are a part of, is growing at a far faster rate than the rest of the funds management industry Down Under,” said Benjamin Pedley, a Melbourne-based investment director at UCA Funds Management, which oversees about A$990 million. “Investors, and millennials in particular, are of the view and understanding that doing the right thing by the community and the world does produce better outcomes.”

Still, that growth is coming off a low base. A 2014 Global Sustainable Investment Alliance study shows socially responsible investments comprised 0.8 percent of total managed assets in Asia, a region that is home to the largest emitter of carbon from fossil fuels. That compared with 59 percent in Europe and 18 percent in the U.S.

No Definition

While there’s no agreed definition on what an ethical fund should be, there are two main subsets: first, those that screen out stocks from fossil-fuel producers to gun makers and gambling firms, and do what they like with the rest. Then there are money managers such as Macri who also seek investments that, as he puts it, leave a positive mark on the world.

His eight-person team has been buying shares of Innate Immunotherapeutics Ltd., an Australian developer of technologies used to fight cancers and multiple sclerosis, whose shares have more than doubled in 2016. It also owns Somnomed Ltd., which makes products to help people who snore and has posted a 33 percent stock rally this year. The S&P/ASX 200 Index is up 3.3 percent in the same span.

“It’s like having your cake and eating it too,” Macri said. “A lot of investors love what they do, but there may be a question of whether it’s a noble profession. We don’t have those doubts.”

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