- SRI portfolios remain popular and continue to perform well
- Wealthsimple SRI is the top 1- and 2-year total portfolio performer
- Morgan Stanley SRI leads 1-year equity performance
Investing with a focus on environmental, social, and governance (ESG), also known as socially responsible investing (SRI), has increased rapidly in popularity as of late. Morningstar reported that ESG/SRI funds had a net inflow of $20.6 billion dollars in 2019. This is a 300% increase from net flows in 2018.
But buyer beware. A recent Investment News piece highlighted some of the issues with ESG investing, citing mainly a lack of clear industry standards and “greenwashing.” However, available products have been wildly popular and their performance seems to justify their higher fees.
Many robo advisors have launched SRI themed portfolios and they are proving popular amongst users. One concern many investors have is whether or not opting for an SRI portfolio will be detrimental to their portfolios’ performance. While management fees at the providers that we cover do not increase when opting for an SRI themed portfolio, the underlying funds’ expense ratios typically are higher for thematic funds employed by the robo advisors. After tracking many of these portfolios for over two years now, we have witnessed promising performance results.
SRI Portfolios Continue to Post Strong Results
Socially Responsible Investing (SRI) portfolios are continuing to perform strongly. Our TIAA, Morgan Stanley, and Betterment SRI portfolios now have a full two-year performance track record. All three outperformed the non-SRI portfolio tracked at each provider over the same period. Betterment’s
SRI portfolio outperformed on a total-return basis despite having a slightly lower risk allocation and holding 60% equities compared to our regular portfolio, which holds 65%. Over the one-year period, Betterment’s standard portfolio outperformed on a total-return basis. However, when looking at the portfolios compared to the Normalized Benchmark, which accounts for diﬀerences in equity and ﬁxed-income allocations between portfolios, the SRI portfolio outperformed the regular.
Of the eight SRI portfolios we track with a one-year track record, results were less consistent. Merrill, TIAA, Wealthsimple, Morgan Stanley, and Wealthsimple SRI portfolios all outperformed their regular counterparts based on both the total return and return compared to the Normalized Benchmark. The standard Ellevest, TD Ameritrade, and E*Trade portfolios, on the other hand, outperformed their respective SRI portfolios. Our TD Ameritrade SRI portfolio experienced a trading mishap at the end of 2018 due to tax-loss harvesting. While this error signiﬁcantly held back the portfolio’s performance starting in the ﬁrst quarter of 2019, this trading mishap was not related to the portfolio’s SRI theme. Betterment’s one-year results were split: the regular portfolio outperformed based on total performance, while the SRI portfolio outperformed based on performance compared to the Normalized Benchmark.
The SRI portfolios we track are performing well compared not only to the standard portfolios at the same provider but also compared to all of the taxable portfolios we track. Over a one-year trailing period, the Wealthsimple SRI portfolio and the Morgan Stanley SRI portfolio placed ﬁrst and third overall, respectively, for top equity performance. This is an impressive showing as the report now contains 43 portfolios with a one-year track record. Additionally, the TIAA SRI portfolio placed second for total performance in the two-year time period.
While the track record of our SRI portfolios is still short, our performance results are a positive sign for investors interested in SRI oﬀerings. The SRI portfolios that we track rely on SRI-focused funds, which typically carry higher expense ratios compared to low-cost index funds commonly held by robos. So far, investors in SRI portfolios at digital advice providers have not experienced a signiﬁcant performance drag, despite higher fees, when opting for these portfolios. In fact, the available data suggests that SRI portfolios may be able to provide higher net-of-fees performance.