The Fundata FundGrade® A+ Award has become one of the most highly-coveted investment awards in Canada because it is so exclusive. Only 225 funds out of about 29,000 funds and clones achieved the Award in 2014. The FundGrade A+ Rating is also the only awards system in Canada that segments and awards funds with a socially responsible investing (SRI) mandate. In 2014, SRI funds offered by NEI, PH&N, and Meritas joined the exclusive FundGrade A+ club.
The FundGrade A+ Award was developed by Fundata Canada using purely quantitative selection criteria to highlight the best and most consistent funds for the year on a risk-adjusted performance basis.
The process for selecting SRI winters is similar to that of Fundata’s FundGrade rating system, but the universe of eligible funds is restricted to those funds that are designated as responsible investing funds by the Responsible Investing Association (RIA). Funds are then grouped according to asset class as Equity, Balanced, or Fixed Income, and the best-performing fund from each group, according to the FundGrade criteria, is given the award. Here’s a look at the three category winners from 2014:
SRI Equity: NEI Ethical Special Equity Fund
The NEI Ethical Special Equity Fund is a repeat winner from 2013 and is helping debunk the myth that SRI funds typically underperform by also winning an A+ Award in its regular equity category. It’s been a first-quartile performer in three of the past four calendar years, returning 37% in 2013 compared with 4.3% for the BMO Canadian Small Cap Index.
Of course, the FundGrade methodology considers risk-adjusted performance. Part of the reason for this fund’s success is its limited volatility as can be seen in the accompanying graph. The 3-year and 5-year annualized standard deviations are 7.5% and 8.5% respectively, ranking the fund fifth and third in the Canadian Small/Mid-Cap Equity category.
Managed by Calgary-based QV Investors Inc., the fund looks for companies with a market cap between $100 million and $2.5 billion that have passed the environmental, social, and governance (ESG) criteria. More specifically NEI’s SRI program has four components: 1) ESG Evaluations – analysis and monitoring of ESG performance; 2) Corporate Engagement Program – engagement of companies to improve practices and performance; 3) Public Policy and Standards – responding to regulation to address risks; 4) Research – research key issues to enhance company evaluation, engagement, and policy work. More detail on each component can be found in the fund’s prospectus.
SRI Balanced: PH&N Community Values Balanced Fund
PH&N Community Values Balanced Fund is a fund-of-funds holding three other members of the PH&N Community Values fund family: PH&N Community Values Bond; PH&N Community Values Global Equity; and PH&N Community Values Canadian Equity. This mix results in the allocation shown in the accompanying graph:
The combination has worked out well, as the fund has outperformed the Fundata Canadian Balanced Index in each of the past three calendar years. The fund’s 3-year average annual compound return of 12.0% is almost 4 percentage points better than the 8.1% for the median of the Canadian Neutral Balanced category median. The 5-year standard deviation is 5.8%, slightly higher than the group median of 5.0%, but this is expected because the fund is holding about 60% equity, which is the maximum allowable equity allocation in the Canadian Neutral Balanced category.
As a wholly owned subsidiary of Royal Bank, RBC Global Asset Management manages the PH&N Community Values funds according to a set of their own socially responsible investment criteria. This results in a list of companies that according to RBC, “show leadership in environmental practices and are committed to complying with environmental regulations; respect workers’ rights and encourage equal employment opportunities; adhere to strong corporate governance practices; and do not support the acts of repressive regimes.” They also avoid companies that produce or distribute alcohol, tobacco, pornographic materials, gaming, and military weapons.
SRI Fixed Income: Meritas Income & Growth Portfolio
Meritas Income & Growth Portfolio is another repeat winner from 2013 also employing a fund-of-funds strategy. Holding primarily other Meritas SRI funds, the target asset mix of this fund is actually 65% fixed income/35% equity, with the prospectus stating that the manager “can deviate from the benchmark weightings by up to 7.5%.” The result is a fixed-income-heavy fund investing primarily in Canadian fixed income with some Canadian and U.S. equity mixed in.
The Meritas funds, managed by OceanRock Investments Inc., have their own criteria for socially responsible investing. The high level SRI criteria specified by OceanRock include: 1) Respect the dignity and value of all people; 2) Build a world at peace and free from violence; 3) Internalize a concern for justice in a global society; 4) Exhibit responsible management practices; 5) Support and involve communities; 6) Practice environmental stewardship; 7) Direct community development investments. The last point is a unique feature of Meritas funds, as they will actually allocate up to 2% of each portfolio to “certain types of community development investments.” More detail can be found in the fund’s prospectus.
Reid Baker is Director, Analytics and Data, at Fundata Canada Inc., a leading source for investment fund information, and is Chairman of the Canadian Investment Funds Standards Committee (CIFSC). This article first appeared in the Spring 2015 issue of Your Guide to Responsible Investing, published by Brights Roberts Inc.
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.