Fidelity International has extended its range of sustainable investment funds with the launch of three actively managed enhanced equity ETFs on London Stock Exchange and Xetra.
Nick King, Head of ETFs at Fidelity International.
The ETFs provide broad US, European, and global equity market exposures while targeting companies that Fidelity believes offer superior sustainability and fundamental characteristics.
The funds employ a systematic, quantitatively driven approach that leverages proprietary Fidelity analyst research.
They are the Fidelity Sustainable Research Enhanced US Equity UCITS ETF (FUSR LN / FUSR GR), benchmarked to the MSCI USA Index, priced at 0.30%; the Fidelity Sustainable Research Enhanced Europe Equity UCITS ETF (FEUR LN / FEUR GR), benchmarked to MSCI Europe, also priced at 0.30%; and the Fidelity Sustainable Research Enhanced Global Equity UCITS ETF (FGLR LN / FGLR GR), benchmarked to MSCI World and priced at 0.35%.
While the funds are benchmarked to well-known indices for performance measurement purposes they are free to add or exclude companies as deemed appropriate and maintain different-to-benchmark weights.
That said, Fidelity has stated that tracking error will typically not exceed 2%, so it is likely that the funds will bear a close resemblance to their designated benchmarks in terms of geographic and sector exposure and risk profile.
The portfolio of each of the funds is determined by selecting and weighting in favour of those stocks that Fidelity’s research analysts have identified as having a positive fundamental outlook and strong sustainability credentials.
Fidelity states that the fundamental research process combines broad bottom-up, company-specific research with macroeconomic factor analysis and forecasts, with companies scored based on research analyst views depending on buy/sell recommendations and how recently the rating was issued. These scores are then used to generate predicted return values for each stock.
Environmental, social, and governance (ESG) considerations are integrated into the portfolios by way of screening and company-specific ESG scores.
The screens are based on globally recognised standards and principles in areas, such as environmental protection and human rights, and rely on third-party data providers to identify whether a company either participates in, or derives revenue from, an activity that is inconsistent with the funds’ values, such as the manufacture of controversial weapons and tobacco.
As well as excluding non-compliant companies, the portfolios are systematically tilted towards those companies that command higher ESG scores. A company’s ESG score is determined using a combination of third-party data and in-house research which together assesses key risk factors, including, for example, accounting and tax policies, disclosure and investor communications, shareholder rights, remuneration, and social and environmental factors.
Interestingly, neither the ESG score assessment nor the related screening may ultimately be determinative on investment decisions. The portfolio managers are free to determine that, although a company does not meet the relevant ESG criteria, the fund may still purchase and retain its stock where it believes that it is in the best interests of the fund – presumably for performance purposes. For ESG purists seeking consistency throughout their portfolio, this might be something to look out for.
Fortunately, Fidelity publishes full portfolio holdings despite them being actively managed funds.
In terms of holdings, the portfolios appear to contain between 250 – 500 stocks, depending on geographical region, and are optimised to maximise predicted returns and thus outperformance of the target benchmark. The portfolios are rebalanced quarterly.
Commenting on the launch, Nick King, Head of ETFs, Fidelity International, said, “These new ETFs provide an enhanced beta exposure by leveraging both our proprietary ESG ratings and our fundamental research insights to select and weight securities, whilst seeking to capture the characteristics of the broader market. We believe these are cost-effective and differentiated products aligned to the needs of ESG conscious investors.”
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, Fidelity International, added, “Sustainable investing has proven to be one of the most significant shifts in asset management in a generation, heightened by increasing evidence that ESG investing can enhance financial returns. This trend was reaffirmed in our own research where stocks with higher ESG ratings outperformed lower rated stocks during the recent Covid-19 induced market sell-off.
Lida Eslami, Head of Business Development, ETP and IOB, London Stock Exchange, commented, “Public awareness of environmental issues has never been greater, and ETFs are an increasingly efficient way for investors to incorporate sustainable investment objectives into their portfolios.”
FUSR appears to have been seeded with $5m, FEUR with about $12m, and FGLR with $15.5m.
In terms of competition, there is a growing number of ESG ETFs offering exposure to US, European, and global equity markets. Perhaps the nearest comparables might be the JPM US Research Enhanced Index Equity (ESG) UCITS ETF (JREU LN / JREU GY), JPM Europe Research Enhanced Index Equity (ESG) UCITS ETF (JREE LN / JREE GY) and JPM Global Research Enhanced Index Equity (ESG) UCITS ETF (JREG LN / JREG GY) from JP Morgan Asset Management.
Like the new Fidelity suite, these funds endeavour to deliver enhanced index-like characteristics while also exploiting active stock-specific in-house insight incorporating fundamental and ESG considerations. Collectively, these funds have gathered just shy of $460m in assets. They are also slightly cheaper with fees of 0.20% to 0.25%.