Russell Investments Australian Responsible Investment ETF Limited (ASX:RARI) Portfolio Manager, James Harwood talks about the impact that responsible investing can have on performance.
Rachael Jones: Hello I’m Rachael Jones for the Finance News Network. Joining me today from Russell Investments Australian Responsible Investment ETF (ASX:RARI) is Portfolio Manager, James Harwood. James, welcome back.
James Harwood: Thanks Rachael, good to be back.
Rachael Jones: First up, could we start with an introduction to the ETF?
James Harwood: RARI, which is the ticker of the ETF on the ASX, it was launched around three years ago. It provides investors with a broad range of exposure to Australian shares that all score highly on a widely accepted range of environmental, social and governance principles. Now historically, ESG has been quite niche and it’s also meant a high cost point. And when we launched this ETF, it was very clear from clients and advisers that they really wanted an ESG fund, but at a much lower cost point.
Rachael Jones: Now to the ETF in more detail. What can you tell me about the composition?
James Harwood: One unique aspect of RARI is the Responsible Investment Committee. This committee meets twice a year and they take the starting 250 stocks that make up the FTSE Russell Australia index. And then they apply the ESG screen. We then apply two positive tilts. The first is another ESG screen, but here we’re using ESG scoring from a company called Sustainalytics. And we’re taking overweight positions in companies that score highly on ESG, scoring from Sustainalytics. Finally a third positive tilt is applied and that’s around yield. We know that a lot of investors in the ETF are low tack investors, they value franking credits and consequently, we want to take a positive tilt to stocks that have above average yield.
Rachael Jones: What can you tell me about the performance?
James Harwood: One of the purposes of the design of the product was for performance to be quite similar to a benchmark, like the ASX200. Many ESG funds in the past have taken quite large bets, just on the ESG principles and really not addressed the risk aspect, of some of those bets. RARI has a return stream that’s much more like the ASX200 and that was really intentional in how we designed the product.
Rachael Jones: Are there any other points you’d like to add?
James Harwood: Yes, so I mentioned that cost was an important factor and the cost of the RARI ETF is 45 basis points, per annum. And that compares really favourably to a managed fund that’s an ESG managed fund. In addition, just like all of our other ETFs, investors can have complete transparency. They can pull their holdings on a daily basis off our website and that’s another positive comparison, to a managed fund.
Rachael Jones: What impact does excluding stocks have on the portfolio compared to the broader market?
James Harwood: The exclusions from the Responsible Investment Committee, they amount to around 17 per cent of the ASX200. So RARI is an ETF that’s taken material positions based on ES and G grounds, and that’s definitely not the case for some ESG funds. Another really important aspect that despite this 17 per cent of exclusions, we’re able to deliver a fund that has index returns, or returns that are quite similar to an index like the ASX200, over a longer period.
We know that some of the earlier ESG funds often took quite large bets, and took a lot of large risks to broad benchmarks. And a lot of investors, they want to have the ESG aspect of a fund, but they really aren’t willing to accept big performance variations, to an index like the ASX200. And that’s why we think the composition of the RARI ETF, it meets a lot of objectives of potential investors.
Rachael Jones: Historically, responsible investing has been quite niche. What is the interest in this area today and how has that changed?
James Harwood: Responsible investing is definitely becoming more mainstream. We’re speaking to a number of adviser groups that are really developing quite large books of ESG related business. And that’s really encouraging and it’s led to a lot of competition in these kind of products now. That’s good for investors.I mentioned that RARI has a management fee of 45 basis points and that’s much lower than a lot of managed funds, in this space. And essentially as it becomes more mainstream, the amount of options available to invest within the ESG is just going to increase, for potential investors.
Rachael Jones: Last question James. What can investors expect if they invest in the ETF?
James Harwood: RARI provides investors with exposure to a broad range of companies that all score highly on environmental, social and governance grounds. Now that’s not the case with many Australian equity funds, where there ESG policy just focuses on the governance aspect. In addition, RARI provides the ESG qualities at a very attractive cost point of 45 basis points. It also provides investors with a yield that’s around five per cent. That’s about 0.5 per cent above the market and well above cash rates.
Rachael Jones: James Harwood, thanks for the update.
James Harwood: Thank you Rachael.