Henry Shilling

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TBLI Conference Europe 2013 Sustainable and Responsible Investing in U.S. Fixed Income Mutual Funds/ETFs: Opportunities for Improvement and Product Development in Sector Poised for Growth November 14-15, 2013 November 14, 2013

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Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer debate on ESG and Impact Investing trends, private equity, portfolio strategy, food production, emerging markets, sustainable energy or philanthropy investing.

Transcript of Henry Shilling

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TBLI Conference Europe 2013 Sustainable and Responsible Investing in U.S. Fixed Income Mutual Funds/ETFs: Opportunities for Improvement and Product Development in Sector Poised for Growth

November 14-15, 2013

November 14, 2013

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Observations» Limited attractive offerings available to fixed income investors interested in sustainable and responsible investment strategies* via

registered mutual funds or ETFs in the U.S.

» 23 funds and $13.1 billion in assets

Limited offerings

Higher expense ratios

Lagging total return performance.

» While there are additional challenges associated with applying ESG to fixed income investing, opportunities for improvement and product development exist to take advantage of a market segment that’s poised for growth.

 *Investment approach that takes into account environmental, social and governance (ESG) factors

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Fixed income ESG funds strategies» SRI Strategy No. of Funds

Total Net Assets ($ millions)

Exclusionary practices 15 9,395.5

Thematic investing: CRA integration

3 2,060.2

ESG Integration + Exclusionary practices

4 1,612.4

ESG Integration 1 68.4

--Totals 23 13,136.5

Total net assets as of 9/30/2013; Sources: Morningstar and Moody’s analysis.Exclusionary practices typically include alcohol, tobacco, military weapons, firearms, nuclear power and gambling.

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Fixed income ESG funds strategies

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Mutual fund assets vs. ESG funds assets

Fixed Income Funds Equity/Balanced Funds

Total net assets as of 9/30/2013 in $ billions; Sources: Morningstar, ICI and Moody’s analysis

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Fixed income ESG funds management firms

Investment Manager # FundsTotal Net Assets

($ millions)

Calvert Investment Management, Inc. 9 5,013.7

PIMCO 2 4,052.8

Community Capital Management, Inc. 1 1,540.4

Pax World Management LLC 1 593.0

RBC Global Asset Management (U.S) Inc. 1 519.8

Everence Capital Management 1 344.9

SEI Investment Management Corp. 1 300.1

Parnassus Investments 1 186.2

Schwartz Investment Council, Inc. 1 140.8Capstone Asset Management 1 138.3

Seix Investment Advisors 1 124.9

Barrow, Hanley, Mewhinney & Strauss 2 113.2

Teachers Advisors, Inc 1 68.4

--Totals 23 13,136.5

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Average ESG portfolio credit quality and duration

Ultra Short/Short Duration

Intermediate Duration

Long Duration

High Grade/Gov’t

$1,715.8/14%

Medium Grade

$2,816.3/23%

$6,804.1/55%

$406/3%

Low Grade $734/6%

Note: Excluding 2 funds due to use of leverage and investments in stocks; may not add due to rounding

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Fixed income ESG funds average expense ratios

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Fixed income ESG funds average turnover rates

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Fixed income ESG funds total return performance

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Fixed income ESG funds implementation challenges» Limited evidence of positive performance impact

Potential positive impact on cost of funding.

» Limited evidence of risk mitigation or potential for limiting adverse impact on credit. » Challenges of applying to fixed income securities or

portfolios: Company, issuer or instrument Tenor Security type: Structured or derivative instruments.

» Availability and quality of ESG data for fixed income securities: Corporate, sovereign and tax-free.» Supply of available securities that meet ESG criteria. » Limited ability to engage in shareholder activism.

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Conclusions

» ESG fixed income product offerings for retail and institutional investors are limited at a time when more investors are expected to seek to apply an ESG approach to their fixed income portfolios.

» Current offerings may be hindered due to:

Lack of scale

Higher than average fees and total return underperformance.

» While there are challenges associated with applying ESG to fixed income investing, opportunities for improvement and product development exist to take advantage of a market segment that’s poised for growth.

 

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Contact information

Henry Shilling Senior Vice President Social Performance Group

Moody's Corporation

[email protected] (212) 553-1948

 

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