NFO Update: quant ESG Equity Fund
Incorporated in 1996, quant Mutual Fund is one of the oldest mutual funds in India that has come out with its new fund offer (NFO). The fund house has launched quant ESG Equity Fund. The NFO has already opened for subscription and will close on October 30, 2020. The scheme will reopen for normal subscription within five business days from the date of allotment. Looking at the other ESG funds, the style of investing for the funds will be mostly large-cap.
Objective: The objective of the fund is to generate long-term capital appreciation by investing in a diversified portfolio of companies demonstrating sustainable practices across environmental, social & governance (ESG) parameters.
Strategy: The investment strategy of the scheme will be to invest in a basket of securities based on combining existing traditional fundamental, bottom-up financial analysis along with a rigorous analysis of the environmental, social & governance aspects of the company. The ESG process will be executed at various levels:
Sector level screening: The scheme will exclude sectors/themes that are deemed harmful from a societal perspective. Fund will avoid investment in companies operating in those industries and maintain that exclusion on an ongoing basis. For example, the fund will not invest in companies involved in cluster munitions, anti-personnel mines, and chemical and biological weapons.
Stock level screening: Apart from the sector exclusion list, the fund will not invest in stocks, which throw up ESG red flags, even if the company is from a sector that is not a part of the exclusion list.
Portfolio construction: While the more traditional financial indicators and the analysis of business strategy form the basis of investment decisions, ESG factors may impact the investments in two ways: first, through the size of the position, given its impact on the inherent risk to our financial forecasts and secondly, via fund’s view of the ultimate long-term value of the company based on its readiness to face some of these issues, from both an upside and downside perspective. Fund will primarily focus on the longer-term impact of ESG issues rather than unduly weighting factors, which are currently occupying market attention.
ESG-based investment philosophy has its roots in the United States and Europe set in 1960-70. In Europe, the first sustainable and responsible investment (SRI) fund was launched in Sweden in the 1960s whereas, socio-political movements in the US, led to the start of socially responsible investments in the 1970s. According to Morningstar, funds that invest according to ESG principles attracted net inflows of USD 71.1 billion globally between April and June this year, pushing assets under management in the products to a new high of just over USD 1 trillion.
Fund Manager: The new scheme will be jointly managed by Ankit Pande, Fund Manager (Equity), Sanjeev Sharma, Fund Manager (Debt), and Vasav Sahgal (International Equities). The performance of the scheme will be benchmarked against Nifty 100 ESG TRI.
Our View: In India, ESG Funds are still at a budding stage, and currently, they form less than one per cent of the total equity dedicated funds. Besides, few of the ESG funds have underperformed large-cap index such as Nifty 50 in the last six months and one year period. So, if you believe that you are a socially responsible investor and willing to align your values with the investments made, even if it means slightly lower returns initially, the already existing ESG funds could prove to be the one for you.