Are Australians paying more for sustainability?
Pleasingly, average fees charged for sustainable funds are competitive with mainstream fund peers.
This is a snippet from Morningstar's quarterly Sustainable Investing Landscape for Australian Fund Investors, Q1 2020. Morningstar Premium subscribers can view the report here.
Sustainable investing has been steadily growing in popularity in recent years. At the end of first-quarter 2021, retail assets invested in sustainable funds as identified by Morningstar topped a record $27.9 billion. The rate of growth in the sustainable fund market continues to be robust, with $1.5 billion of estimated flows in the first quarter, the second-highest quarterly flows on record.
One concern that arises among those new to this type of investing is price. Are sustainable funds more expensive as a group than mainstream funds? Do investors have to pay up for ESG screening?
To answer this question, we leverage a similar methodology used in Morningstar's Global Investor Experience report from 2019 to calculate the asset-weighted median net expense ratio for broad asset classes of funds inclusive of both active and passive products. We calculated these ratios for both sustainable investments (as defined by fund prospectus and through Morningstar's sustainable fund taxonomy) and "traditional" counterparts.
The intent of using an asset-weighted expense calculation is to understand not just what fund manufacturers are charging but also what Australians are paying based on assets currently invested.
Asset-Weighted Median Expenses of Australasian Sustainable Investment Funds
Source: Morningstar Direct. Data as of March 31, 2021. Universe: Managed funds and ETFs, Australia-domiciled. Excludes fund of funds.
Through this calculation, we found that in equity and fixed-income categories, the asset-weighted median net expense ratios for sustainable investments were 6 basis points and 9 basis points lower than traditional (non-sustainable) funds.
The cause of this can be attributed to the fact that there is currently a higher percentage of lower-cost passive investment within the sustainable investments universe in Australia, compared with the broader (traditional) market.
Admittedly, the relatively small number of sustainable funds identified leaves much to be desired in terms of determining a true indication of median net expense ratio. Morningstar will continue to keep an eye on this area as we see additional product offerings come to market.
What can we conclude from this?
- Australians are paying slightly less for sustainable equity and fixed-income funds, when compared with traditional (non-sustainable) funds.
- We attribute this to the higher percentage of lower-cost passive investments within the sustainable investments universe in Australia, compared with the broader (traditional) market.
Funds top $27.9 billion | Industry snapshot
Industry size: At the end of first-quarter 2021, Morningstar estimates that retail assets invested in Australasian sustainable investments were $27.9 billion, an 8 per cent increase compared with 31 Dec 2020 and a 54 per cent increase compared with 31 Mar 2020. Estimated first-quarter flows of $1.5 billion was the second-highest on record, only topped by fourth-quarter 2020 flows of $1.9 billion.
Aggregate Fund Size of Australasian Sustainable Investments ($, Mil)
Source: Morningstar Direct. Data as of March 31, 2021. Excludes fund of funds.
Flows: Inflows over the past year of $4.5 billion have been split predominantly towards active ($2.7 billion, or 60 per cent) rather than passive ($1.8 billion, or 40 per cent) strategies. Five fund houses dominated fund flows, with BetaShares, Dimensional, Australian Ethical, Pendal, and Vanguard accounting for the majority of inflows for the quarter. Equity managers captured the bulk of inflows over the March quarter, with $859 million, well ahead of the $376 million accumulated by allocation strategies and $253 million by fixed-income strategies.
Providers: The Australian sustainable funds market remains quite concentrated, with the top 15 funds accounting for 52 per cent of total assets in the sustainable fund universe. Australian Ethical and Vanguard remain the dominant Australasian providers of sustainable funds, each with about a 20 per cent market share.
Performance: Over the one year to 31 Mar 2021, 47 per cent (48 of 102) of sustainable investments outperformed their peers within their respective categories. This underperformance can be intuitively explained by the general underweight to the fossil fuel sector that rebounded strongly since 2020 lows.
Products: Morningstar has identified 129 Australasia-domiciled (Australia and New Zealand) sustainable investments through our intentionality framework. Compared with Europe and the United States, the sustainable fund market is still relatively small in Australia. The momentum of sustainable fund launches has lifted significantly since 2015. The year 2020 was the fifth consecutive year of double-digit fund launches. Recent fund launches have been split relatively evenly between new active and passive strategies.
Product availability: In 2020, Morningstar unveiled a framework for identifying sustainable investments to help investors understand the various approaches employed by fund managers. The framework is not meant to measure magnitude or effectiveness but rather to identify scope.
Sustainable Investment Attributes
By and large, Australians have the most choice when investing in funds that use ESG Incorporation techniques, but there are fewer choices in terms of funds that invest in an Impact manner or when it comes to Environmental Sector Funds.
Of the129 Australasia-domiciled sustainable funds, 97 employ some form of exclusion from investment in controversial areas, with a high number of funds excluding tobacco (96) and controversial weapons (90) (companies that derive a significant portion of revenue from nuclear weapons, land mines, cluster munitions, and so on).