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June 2016
company finds itself involved in a serious controversy
related to issues such as environmental protection
or labor supply-chain management. For the most part,
though,
ESG
analysis identifies companies that
are managing their
ESG
risks and opportunities more
effectively over the long term and which therefore
may be attractive to buy-and-hold investors. The third
trait is a connection with quality management.
Companies with forward-looking management teams
may be more likely to be effectively addressing
long-term sustainability impacts on their businesses.
We found support for all three traits among M
500
funds with better Sustainability Ratings.
Risk
M
500
funds with better Sustainability Ratings are less
risky than those with worse Sustainability Ratings.
Using the Morningstar Risk rating, which is a relative-
to-category measure, we found that
24%
of
5
-globe
funds had Low Morningstar Risk relative to their cate-
gory peers, while only
9%
of
1
-globe funds did. Only
12%
of
5
-globe funds had High Morningstar Risk, while
19%
of
1
-globe funds did.
Turnover
Low turnover indicates a longer-term, buy-and-hold
philosophy among fund managers. M
500
funds with
the best Sustainability Ratings have lower turnover
than those with the worst ratings. Five-globe funds’
average turnover is roughly half that of
1
-globe funds.
Quality
Using two measures of quality, one quantitative (return
on invested capital) and one qualitative (Morningstar
Economic Moat Rating), we found funds with the best
Sustainability Ratings also have higher portfolio
average
ROIC
and higher exposure to wide-moat firms.
Funds With High Sustainability Ratings
The Sustainability Rating applies to all funds where
we have sufficient data, not only those with
explicit mandates to be “sustainable” or “responsible”
investments. We evaluate such funds on the same
basis as any other. Our rating confirms that most such
funds are indeed doing what they claim: Silver-
rated
Parnassus Core Equity
PRBLX
, Bronze-rated
Neuberger Berman Socially Responsive
NRAAX
,
and Bronze-rated
TIAA-CREF Social Choice Equity
TICRX
all rate
5
globes and would be good choices
for investors looking to incorporate sustainability into
their portfolios. The advantage of using these funds
is the knowledge that sustainability is an explicit
priority that will be maintained over time. Two other
funds that base their investing on Islamic principles,
but also use
ESG
factors to build their portfolios,
rate
5
globes: Bronze-rated
Amana Growth
AMAGX
and
Amana Income
AMANX
.
Such “intentional” options are few and far between,
however, representing only about
2%
of the fund
universe. Our rating helps you sort through the entire
universe to find conventional funds that do well on
sustainability. Among the M
500
are a number of com-
pelling options—funds with strong track records,
Analyst Ratings, and Sustainability Ratings of
4
or
5
globes. Many of these funds also have low-risk,
buy-and-hold, and high-quality characteristics. Notable
examples include the Gold-rated funds managed
by the Primecap team; Silver-rated
Jensen Quality
Growth
JENSX
; and Gold-rated
Fidelity Low-
Priced Stock
FLPSX
,
MFS Global Equity
MWEFX
,
and
Artisan International Value
ARTKX
.
If you are interested in incorporating sustainability
factors into your portfolio, the Sustainability Rating
can help guide you. Because it only measures port-
folio holdings, not performance, and is not a forward-
looking evaluation of a strategy’s prospects, you’ll
need to include traditional metrics and analysis along-
side it. As you narrow your universe, though, you’ll
be able to find many attractive choices that do well on
sustainability and also on traditional measures.
K
Contact Jon Hale at
jon.hale@morningstar.comSustainability and Medalist Ratings in the M500
Sustainability Rating
M500
%
QQQQQ
QQQQ
%
Q
%
Œ
„
%
‰
34
67.65
8.82
61.76
5.88
68
55.88
10.29
54.41
7.35
110
55.45
6.36
43.64
11.82
61
42.62
22.95
36.07
13.11
32
34.38
40.63
31.25
25.00
Data as of April 30, 2016.