Quantum Mutual Fund has announced the launch of its new fund scheme, Quantum India ESG Fund. ESG stands for Environment, Social and Governance, 3 parameters which together define sustainability. For the new scheme, the ESG criteria will play a key role in selection of stocks for the scheme’s portfolio.
As the world gets hotter, ESG too is becoming the hottest thing in the investing world. World over, trillions of dollars are invested under the ESG guidelines specially by the millennials, high net worth individuals who care about working towards making a better world.
To put it bluntly, our planet is going to the dogs. There are individuals and businesses that don’t care for how their actions affect the planet. Issues like emissions in air or water, data privacy, gender balance, labour policies, etc. are gaining foothold.
When investors start using the ESG criteria, it will force businesses to bring attention to areas that not only focus on the above issues making them sustainable and responsible but also have positive financial impact. In shareholder meetings of US based companies, resolutions around these issues are already being put to vote.
While quality is the most touted theme in investing, ESG criteria adds the conscience layer to quality.
What is the Quantum India ESG Fund?
Here’s an excerpt from the Key Information Memorandum of the NFO –
Quantum India ESG Equity Fund is a step towards ensuring that investments flow into greener and cleaner business. The focus of this scheme would be on investing in businesses, which are ensuring sustainable management of natural and human resources, diversity within the organizational structure, prudent management and socially responsible framework of business.
The investment strategy of the Scheme will be to invest in a basket of stocks after intensive analysis on the environmental, social and governance aspects of the company. The aim is to follow a comprehensive ‘ESG Framework’ in order to develop deeper understanding into a company’s management practices, sustainable businesses and risk profile, which would thereby help us in understanding the impact on long-term sustainability that drives performance.
The primary focus of the Scheme will be on companies based on two criteria. First is for selecting companies under coverage and second is for selecting companies in the portfolio. The first criteria is selecting companies generally trading with liquidity of minimum US $1 million on an average over the last 12 months and second criteria based on their ESG score.
Each security, which is filtered on the basis of first criteria, will be scored on ESG parameters using data sources such as sustainability reports (GRI Framework), Business Responsibility Reports (BRR) and other publicly available documents. Active weights of a security within their respective sector will be determined by a composite ESG score.
A higher ESG score of a security within the sector will have higher relative weight and vice versa. The selection process ensures eliminating exposure to companies that rank poorly on ESG criteria completely. The sum total of the weights of securities in a sector will equal to track sector weights of broad well- diversified indices. The allocations focus on governance and sustainability; hence will be agnostic to valuations.
Quantum India ESG Fund will benchmark itself to the Nifty 100 ESG Total Return Index. You can read more about it here.
Quantum is not the first fund house to have an ESG fund. In 2018, SBI MF also renamed / recategorised its SBI Magnum Equity Fund as SBI Magnum Equity ESG Fund. The SBI scheme has Rs. 2300 crores under its management. I doubt though how many of the fund owners invested / held on for the ESG criteria, specially after the renaming.
While there is no bar on the kind of sector that the fund can go to, Financial Services (Banks, NBFCs) and IT (Software) are likely to dominate the portfolio. They have a natural edge on the ESG criteria. Having said that, HUL representing consumer goods is likely to be a top holding too.
On the other hand, manufacturing is going to have a hard time finding its place. Maruti does not appear in the NSE 100 ESG Index as a top holding nor in the SBI’s ESG fund. Asian Paints does. Titan does.
Overall, when done right, an ESG portfolio is likely to be a ‘clean’ portfolio.
Should you consider this fund?
Quantum already runs the Quantum Long Term Equity Fund – a value style fund that builds its portfolio predominantly from the top 200 stocks. Read more about it here.
Given Quantum’s approach to investing, they are likely to do a good job on this one as well. Quality with low volatility as well as turnover along with focus on preservation of capital mark the key aspects of its approach. It avoids shareholder unfriendly companies.
As for the new fund, we are still not clear on the costs. Their equity fund charges 1.25% + GST, annually. At one time, it was the lowest cost active equity fund but since then many other funds have taken over its advantage.
It will be great if Quantum can operate this fund at a lower expense ratio.
Another thing. While the existing equity fund tends to hold cash and take a call on valuations, the ESG fund is not going down that road. As per the SID extract mentioned earlier, the scheme portfolio will reflect sectoral weightage of the popular market indices. It will be ‘agnostic to valuations’.
In any case, a thematic fund has to invest 80% or more of the AUM in stocks representing the theme.
ESG theme is the extra layer of quality introduced in Quantum India ESG Fund.
Should you invest during the NFO?
Now, you need not invest during the NFO. Wait for the fund to go live and see the first few portfolio disclosures to understand where it is heading. If the fund aligns with your investing criteria, you may consider investing.
Frankly, good investing should not require a new theme based fund. Hopefully, in the future, the difference will disappear as 100s of ESG funds make their presence felt.
How do you see this new fund offering? Do share your views and comments.