How ESG mutual funds can help to enhance investment returns, explains Swarup Mohanty
4 min read 31 Oct 2020, 06:34 AM ISTMohanty tells us why it makes sense to invest in ESG mutual fundsESG funds have a lower downside risk, he says
PremiumMirae Asset Mutual Fund has recently launched two ESG ETFs namely, ‘Mirae Asset ESG Sector Leaders ETF’, an open-ended scheme tracking NIFTY 100 ESG Sector Leaders TRI and the ‘Mirae Asset ESG Sector Leaders Fund of Fund’, an open-ended fund of fund scheme predominantly investing in Mirae Asset ESG Sector Leaders ETF. We spoke to Swarup Mohanty. CEO, Mirae Asset Investment Managers (India) to understand the rationale behind investing in ESG mutual funds. He says "ESG investing has generated more wealth compared to their plain vanilla peers due to lower downside risk, increased productivity, better image, higher valuation premium."
The NFO for both the ESG funds is open and will close on November 10.
Swarup Mohanty also shared the unique strategy adopted by the fund house that helps their equity schemes to deliver consistent performance.
What is your view on the current market?
We find the market as reasonably attractive on from a long-term view, i.e. 3-yr viewpoint considering--we believe that the Price to Book Value(P/BV) is a better indicator of market valuation in the current scenario – on FY22 forward P/BV, Nifty is at 2.5x which is slightly above its last five year mean. Sectorally, Financials trade at -18% discount to its 5 year P/BV.
We entered the crisis when the economy was coming out of a recession with PAT/GDP at a 15 year low at 2.5% in FY20. Post a solution to Covid-19, we see less scope for long term contraction on this favourable base.
Covid-19 is a “one-off event" which would impact FY21 earnings significantly, but FY22 EPS will revert to mean. The basic fact that the change in intrinsic value because of 1-2 yr. disruption caused by pandemic is not very high as value (of underlying businesses) is more driven by long-term assumptions and thus DCF based valuation do not change materially.
Most of the Mirae's equity schemes have been top performers in their respective categories consistently. What is the unique strategy which is helping to deliver such amazing returns in these chaotic markets?
Mirae Asset Equity process is based on team-based approach. We would like to outline the two key aspects of investment philosophy:
Stock selection: Our investment philosophy is centered around participating in quality businesses, but up to a reasonable valuation. Analysis of all three buckets – Business, Management, and Valuation is important from a risk-reward matrix and outliers are avoided. These outliers include a sub-par quality of business or management, and at the other extreme great businesses but with an expensive price tag.
Portfolio construction: Discipline, and adequate diversification is important. We seek to construct diversified portfolio, which could handle mistakes and deliver decent risk-adjusted returns.
We are pleased that our funds have provided consistent performance to investors, and we would endeavour to provide better risk adjusted returns to investors.
What explains too much focus on ESG investing?
In recent years we have witnessed that Indian Companies are now increasingly impacted by E, S and G factor related issues. Integrating ESG measures will mitigate risk and improve productivity. Going forward companies need to align their business and operational strategy which creates social and economic value. Many Indian companies have already adopted Global Reporting Initiative (GRI) and have aligned their business with one or multiple United Nation Sustainable Development Goals. Companies with strong ESG practices tend to have strong risk management practice which lowers the probability of a negative event and translates into higher profitability and better brand image.
Why should investors look at ESG funds when there are equity funds which are performing well and giving decent double digit returns, including schemes managed by Mirae Asset?
An ESG Portfolio is a specialised portfolio and selecting an ESG based index over pure large-cap enhances the return, lowers the portfolio volatility and drawdown. Generally conventional investing focuses on financial parameters. However more recently it has started incorporating corporate governance risk to certain extent into investment framework. Focus on governance and other two factors of ESG i.e. Environment and Social will reduce the company specific risk in the portfolio. By doing Sustainable investing, investor creates the incentive for companies to adopt sustainable business model, generates long term wealth along with positive impact on the society. ESG investing has generated more wealth compared to their plain vanilla peers due to lower downside risk, increased productivity, better image, higher valuation premium. Europe and US which accounts for more than 70% of total sustainable assets have documented that the ESG integrated funds have outperformed their traditional counter-part.
Most retail investors want decent returns from their investments to meet their non-negotiable goals. Do you believe retail investors are ready to understand the concept of sustainable investing now?
As a Global community we are moving towards Sustainable Investing. Investors both Retail and Institutional investor may expose themselves to risk arising from some irresponsible business practices which can cause abrupt loss to investment that can take substantial time to recoup. ESG investing provides extra non-financial information that helps in identifying long term sustainability of the business over the years. In the long run companies with strong ESG practices have competitive advantage which translates into higher profitability and brand image. These negative events are on the uptick in India as well and we are facing some of the highest risk in terms of ESG parameters. So, its mindful for retail investors to be wary of such a forthcoming risky environment where the portfolio has to be resilient in terms of ESG parameters as well.
