SRI Portfolio Perform Well Despite Higher Fees

In recent years, socially responsible investing (SRI) – also commonly categorized as environmental, social, and governance investing (ESG) – has gained popularity with retail investors and investment managers alike.  Between 2016 and 2018, assets invested in ESG-themed mutual funds grew 34%, while assets in ESG-themed ETF funds more than doubled. Driven by consumer demand, a natural expansion has been undertaken by digital advisors to offer separate SRI portfolio options.  Within the past few years we have opened and funded SRI accounts at each of the providers that offer sustainable investing options. With a year of performance to review, we have assessed the risk and return statistics of SRI portfolios offered compared to their standard offerings.  While today’s focus is on performance, we will publish a full report on the composition of SRI portfolios, including costs and sustainability scores, later this month.

Sustainability scores aside, many of our SRI equity portfolios either outperformed or matched their non-SRI counterparts both YTD and over the trailing twelve months.  Significant outperformance was seen in both the Morgan Stanley and Wealthsimple SRI portfolios, where each outperformed its non-SRI counterpart by over 2% YTD.  Equally impressive results were seen over a one-year period, where Morgan Stanley and Wealthsimple’s SRI portfolios returned 2.76% and 4.76% above their non-SRI portfolio, respectively.  The TIAA SRI portfolio also performed well, returning 1.60% above its non-SRI counterpart over the trailing one-year period. The remaining five digital advisors we compared – Betterment, Ellevest, E*Trade, Merrill Edge, and TD Ameritrade – all had SRI portfolios return within 50 basis points of the equivalent non-SRI portfolios YTD.  
ESG portfolios have been outperforming over the short term of our analysis, however individuals who want to invest with a conscience are likely to pay more in fees.  Acknowledging the short time horizon of the analysis, higher net-of-fee performance is an encouraging sign for the industry and may inspire others to embrace sustainable investing themes.  Outperformance over a longer period may challenge views of investors, who may believe that excluding certain companies from an investment portfolio will negatively impact returns.  Hopefully, investor demand and fee sensitivity will encourage investors as ESG options continues to increase in popularity.