SRI performance mixed during the first half of 2020

Posted on September 15, 2020

  • Through the first half of 2020 results were mixed, with five of eight SRI portfolios outperforming their respective standard portfolios
  • Betterment SRI, Merrill Edge SRI, and Morgan Stanley SRI lead the way over the first half of 2020
  • Over the trailing 2-year period, all five SRI portfolios outperformed their non-SRI counterparts at the same provider despite higher fund fees

Overview

SRI portfolios continue to gain popularity as new ETFs, mutual funds, and SRI-focused robo advisors hit the market. The underlying funds continue to be relatively pricey but performance has still been promising. Year-to-date performance results are mixed. We look into the latest results from our Robo Report to learn more.

SRI flows continue to impress

There has been an increasing demand for socially responsible investing. According to Morningstar, 2019 net flows into SRI ETFs and mutual funds grew to nearly four times their 2018 net flows. Before that, between 2016 and 2018, assets invested in ESG-themed mutual funds grew 34%, according to a study by USSIF.

Strong two-year SRI performance

When looking at the trailing two-year period ending 6/30/20, we have full performance data for five SRI robo accounts and all five outperformed their respective standard counterparts at the same provider. Furthermore, these portfolios outperformed on both a total return basis and when compared to a Normalized Benchmark. The latter result implies that the difference was not due to a difference in asset allocation (e.g. a higher equity %), but that the fund choices within the asset allocation outperformed.

Wealthsimple and Morgan Stanley had particularly large differences between SRI and non-SRI portfolios with over 2% annual outperformance by SRI options when compared to their Normalized Benchmark.

YTD
Return

YTD
Return vs.
Benchmark
2-Year
Return
annualized
2-Year
Return vs. Benchmark
annualized
Betterment-5.36%-3.52%3.27%-2.13%
Betterment SRI-3.67%-2.39%4.04%-1.52%
E*Trade-3.04%-1.76%4.68%-0.88%
E*Trade
SRI
-3.80%-2.41%
Ellevest-3.34%-2.50%3.73%-1.95%
Ellevest
SRI
-2.12%-1.80%4.15%-1.63%
Merrill Edge-4.09%-2.63%3.77%-1.55%
Merrill Edge SRI-0.28%0.91%
Morgan Stanley-3.59%-1.98%3.86%-1.62%
Morgan Stanley SRI-0.91%0.04%6.08%0.41%
TIAA-1.33%0.06%5.28%-0.25%
TIAA SRI-1.83%-0.55%5.78%0.22%
TD Ameritrade-2.81%-0.63%4.92%-0.38%
TD Ameritrade SRI-2.54%-0.76%
Wealthsimple0.43%1.71%3.90%-1.66%
Wealthsimple SRI0.30%1.58%6.88%1.32%

One contributing factor is that SRI options tend to have less of a value-tilt compared to non-SRI robos. For example, Wealthsimple SRI had significantly more exposure to growth equities than the standard Wealthsimple account. Similarly, while both Betterment portfolios are value-tilted, the SRI version has a more modest tilt towards value, helping drive the equities to outperform.

Mixed year-to-date results


Year-to-date results were mixed. Five of eight SRI portfolios outperformed their non-SRI portfolios at the same provider, while only half outperformed when compared to a Normalized Benchmark. This suggests that not all SRI portfolios at robos are outperforming at the same time. Interestingly, even the top three outperformers—Merrill Edge SRI, Betterment SRI, and Morgan Stanley SRI—had some differences in terms of outperformance.


Merrill Edge SRI benefited from a strong relative performance from both equities and fixed income, while Betterment SRI benefitted from only the equity side. When looking at the portfolios, we see that Merrill Edge SRI had approximately 4% more growth and 2% less value than its standard version, according to Morningstar. Merrill SRI had less small-cap exposure which was another tailwind. Meanwhile, Betterment had very similar mid- and small-cap exposure but its SRI had 4% more growth and 4% less value than the standard version.


Morgan Stanley SRI stands out for having outperformed its standard counterpart by over 2% year-to-date. A large contribution to this difference was the fact that Morgan SRI had approximately 3% equity exposure to small-cap, while the non-SRI portfolio held 13%. This was during a period where small-cap stocks underperformed large-caps by close to double digits. When looking at the equity holdings, we see that because Morgan invested in 100% SRI-themed funds, it wound up with all equity funds in the large blend category according to Morningstar. Meanwhile, the standard portfolio held IJR, a small-cap ETF, which lagged insignificantly.

Final thoughts


All in all, the performance of the SRI portfolios tracked by us continues to impress despite higher fees. However, investors should be aware that this may not be due to the socially responsible aspect of the options. It is still unclear whether these SRI portfolios are outperforming based on incorporating environmental, social, or governance factors when selecting assets, or whether outperformance is driven by other factors.

As reporting of ESG factors by companies and the measurement of those factors by reporting agencies to become better, more consistent, and increasingly wide-spread the causation of performance trends in SRI themed portfolios will become more clear. For now, our data is showing early indicators that there is not a significant performance premium paid by those who opt into SRI themed portfolios.

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