SQM Research Ratings Update
* REVISED *
Please note: We have revised the Top 5 SQM Rated Funds table to identify hedged and non-hedged funds.
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ESG in Fund Manager Research
The use of ESG in investment management varies greatly. Across the funds rated by SQM Research, ESG considerations differ depending on factors such as:-
What is much more common is the Governance factor which is almost always covered in any asset class as part of a manager’s due diligence and investment research process.
- Asset Class
- Investment philosophy
- Fundamental, bottom-up research or systematic quantitative approach
- Long/short nature of fund
- Fluctuating degrees of focus on each of the ESG factors.
The spectrum of applying the Environmental and Social components of ESG varies greatly across funds and managers. In Australia, there are 93 Investment Managers that are UNPRI signatories- some of which are rated by SQM Research. (Source- unpri.org).
In SQM’s experience, substantial differences in implementation of ESG principles exist both in our rated universe and in the broader fund management industry. Examples of such variations include:
While SQM Research remains respectful of all the different ways ESG analysis can be sliced and diced in a manager’s investment process, it is important that fund managers remain true and consistent to label. To this end, SQM Research conducts thorough review meetings, applying a ‘fine tooth comb’ to a manager’s investment philosophy and process. This is supplemented by a comprehensive request for information pack that delves into granular details.
- Hard and fast rules on what can and cannot be a potential investment. This includes stocks that are classed as arsenal/ammunition and tobacco.
- An analysis of revenues from business lines that are considered “unethical”. For example, a large conglomerate company that derives x% of revenues from tobacco sales where revenues above a certain threshold will deem the stock un-investable.
- Different approaches to a stock’s value/supply chain practices which can qualify or disqualify the stock for investment.
- Applying third-party ESG research to conclude potential investment universe. Vendors who provide such research include MSCI ESG Research, Responsible Investment Association Australia, and Sustain Analytics.
SQM Research also views favourably a manager’s own business practices with respect to environmental, social responsibilities and governance structures. These include, but are not limited to:
While the world of ESG remains vast and evolving, SQM Research applies a logical and rational approach to understanding a fund manager’s ESG considerations. Without adjudicating a ‘right or wrong’ approach, SQM (using all the tools at its disposal) aims to understand and fairly review a fund manager’s ESG philosophy with respect to the broader investment process and alignment with its investment mandate.
- Community involvement- scholarships, local sponsorships
- Independent Responsible Entity with a majority independent board
- Merit-based employment practices/remuneration that are aligned to investor interests
SQM Research's Top 50 ETFs for January 2019
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For further information:
Rob da Silva - Head of Research
Tel: (02) 9220 4606
Louis Christopher - Managing Director
Tel: (02) 9220 4666
About SQM Research
SQM Research is an independent property advisory, ratings and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit www.sqmresearch.com.au
In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Good. Consider for APL inclusion.
3.5 stars – Average. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Not suitable for APL inclusion.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable. Significant issues have arisen, and investors should avoid or redeem units in the fund.
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.