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Ethical and Non-Ethical Italian Funds: a Comparison of Investment Policies, Costs and Returns

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Ethical and Non-Ethical Italian Funds: a Comparison of Investment Policies, Costs and Returns Master’s Degree Programme in Accounting and Finance curriculum Business Administration Second Cycle (D.M. 270/2004) Final Thesis Ethical and Non-Ethical Italian Funds: A comparison of investment policies, costs and returns Supervisor Ch. Prof. Andrea Veller Graduand Alessia Verza Matriculation Number 843687 Academic Year 2016 / 2017 INDEX INTRODUCTION pag. 1 CHAPTER 1 Socially Responsible Investments and Ethical Funds pag. 3 1.1 Ethics and Finance 3 1.2 The Socially Responsible Investment 6 1.3 The Historical Evolution of SRI Market 9 1.4 The European Market of SRI in the last years 11 1.5 SRI Categories 15 1.6 SRI Strategies and Investment Selection Processes 16 1.7 Characteristics of SRI Investors 23 CHAPTER 2 Italian Ethical Funds’ Analysis pag. 27 2.1 Overview of Italian Ethical Funds 27 2.2 Etica Sgr 29 2.3 Eurizon Capital Sgr 55 2.4 Pioneer Investments 68 2.5 Sella Gestioni Sgr 73 2.6 Ubi Pramerica Sgr 78 2.7 BNP Paribas Investment Partners Sgr 86 CHAPTER 3 The Qualitative Analysis of Italian Ethical Funds pag. 92 3.1 Subjects Involved in the Securities’ Selection Process 92 3.2 The Securities’ Selection Process 98 3.3 The Engagement Policy 127 3.4 Investment Processes in Comparison 130 CHAPTER 4 The Analysis of Ethical Funds’ Cost pag. 134 4.1 The Costs of Ethical Funds 134 4.2 The Regulation of Ongoing Charges 136 4.3 The Comparison of Ethical Funds’ and Non-Ethical Funds’ Ongoing Charges 138 CHAPTER 5 The Analysis of Ethical Funds’ Performance pag. 165 5.1 The Performance of Ethical Funds 165 5.2 The Risk-Adjusted Performance Measures 167 5.3 The Comparison of Ethical Funds’ and Non-Ethical Funds’ Returns 173 and Sharpe Ratio 5.4 Interview to Paolo Capelli 194 CONCLUSIONS pag. 197 APPENDIX A pag. 201 APPENDIX B pag. 223 INDEX OF TABLES pag. 241 INDEX OF GRAPHS pag. 245 INDEX OF FIGURES pag. 246 BIBLIOGRAPHY pag. 247 INTRODUCTION Over the past 20 years, the European Union (EU) has often been at the forefront of efforts to build a financial system that supports sustainable development. A growing number of social entrepreneurs, mainstream financial institutions, as well as public investment banks have led these efforts. Increasingly, European financial policymakers and regulators are exploring their role in enabling an orderly transition to a prosperous sustainable economy. Today, Ethical Finance represents 5% of European GDP (Gross Domestic Products) equal to 715 billion euros. This growing importance is due to the fact that Ethical Investment appears as a new frontier of the traditional investment with the innovative objective of achieving positive impact on the collection and use of money. Ethical finance combines two elements which apparently seem to be in contrast the one with the other, the return and the ethics, and wants to respond to the needs of those investors and savers who are increasingly interested in the way their savings are used. This thesis, developed in cooperation with Alessandro Rota and Riccardo Morassut, respectively Head of Research Unit and Research Analyst at Assogestioni, wants to deeply concentrate on the relation between financial investment and ethics, assessing the differences between traditional and ethical investments mainly from a qualitative point of view. The elaborate is composed of six chapters to better understand the different fields considered in the comparison. The first chapter is purely theoretical and concerns the analysis of the social responsible investment. It explains the evolution of the SRI market where the two different fields of ethics and finance are actually extremely connected, and the different SRI strategies which may be used by asset management companies in the investment selection process to choose those securities in line with the ethical and sustainable principles. The second chapter is probably the most substantial one, as it is the result of a long and detailed research. According to Assogestioni’s list of Italian mutual funds, the ethical ones have been identified and accurately analysed through the examination of the Key Investor Information Document, Prospectus and Rulebook of each fund. The analysis concentrates the attention on the following aspects: the investment policy carried out by the asset management company to manage the fund; the destination of profits and the 1 decision of the AMC to collect or distribute profits to investors; the risk and return profile; the expenses; the asset allocation and main securities. The analysis includes six asset management companies and thirteen Italian ethical funds. The third, fourth and fifth chapters describe and analyse in more detail the main themes mentioned in the second chapter. In particular, in chapter three, a meticulous qualitative research on funds’ ethical investment policies has been carried out. The asset management companies have been compared on the basis of the subjects involved in the ethical securities’ selection process, the investment strategies adopted and on the basis of their engagement policy to find out similarities and differences in the Italian scenario of ethical funds. Chapter four and chapter five, instead, carry out a more quantitative analysis comparing ethical funds and non-ethical funds on the basis of their ongoing charges and returns. The objective is to understand whether Italian ethical funds are more or less expensive than non-ethical funds and whether they are able to generate a better performance. To do this, two different lists of Italian mutual funds have been considered, the one including costs and the other including the 3-year return and Sharpe Ratio of funds. Subsequently, for each category of fund, the ethical funds have been integrated in the overall rankings and their position has been examined on the basis of their cost, 3-year return and Sharpe Ratio. This thesis concludes with an interview to Paolo Capelli, Risk Manager of Etica Sgr and professional in the sector, who provided some considerations about the current importance of sustainable investment and commented the comparison’s results on the basis of his knowledge and experience. In conclusion, the objective of this thesis is not to carry out a statistic analysis of the relation between costs and returns, but rather to develop a precise and meticulous research about the current scenario of Italian ethical funds. It would be an extremely detailed dissertation in which the characteristics of Italian ethical funds are deeply examined in order to assess their increasing relevance in a context in which the element of sustainability and ethics is becoming always more important. 2 Chapter 1 SOCIALLY RESPONSIBLE INVESTMENTS AND ETHICAL FUNDS Summary: 1.1 Ethics and Finance – 1.2 The Socially Responsible Investment – 1.3 The Historical Evolution of SRI Market – 1.4 The European Market of SRI in the last years – 1.5 SRI Categories – 1.6 SRI Strategies and Investment Selection Processes – 1.7 Characteristics of SRI Investors 1.1 ETHICS AND FINANCE The Financial system is the organized group of markets, intermediaries, financial instruments and supervisory authorities. Its functioning takes place in a context of rules and controls that manage the production and supply of financial services, the regulation of trade, the accumulation of savings, the financing of investments and the management of risks. However, this system is constantly evolving by alternating phases of expansion and recession (economic cycle), presenting large peaks, but at the same time heavy crises1. In particular, there have been many financial crises over the last thirty years, but the crisis that emerged in 2007 and peaked most dramatically in 2008, commonly known as “the financial crisis”, was impressive. By the late Summer 2008, a series of major banks collapsed or survived thanks to massive injections of government funds. For this reason, the banks became reluctant to risk lending to each other, and the whole banking system came dangerously close to collapse. Separately from its economic effects, the financial crisis has also impacted enormously on the people’s perception towards finance and the financial sector. Nowadays, in fact, few people will deny that there are some connections between ethics and finance, and even though apparently the concepts of finance and ethics do not fit naturally together, it is undeniable that there are some relationships between the two. 1 Richard Brealy, Stewart Myers, Franklin Allen, Sandro Sandri, “Principi di Finanza Aziendale”, Sixth Edition, Mc Graw-Hill, Milan 2011. 3 It is good practise to begin with a definition of the terms under discussions. Finance is a broad term that describes the relation between the management of money and the process of acquiring needed funds. Essentially, the financial activity has the objective to transfer the excess of wealth produced by savers to people, societies or public entities who need to invest. Nowadays financial markets are a little bit more complicated and the globalization of financial markets linked to the development of IT, ensures a capital mobility like no other. On the other side, Ethics can be described as the set of values that represents the guidelines of people’s moral behaviour and should be shared and respected by all the members of a group2. We may think, for example, to the concept of justice, freedom, law and traditions. These principles, implicitly, define the ethically correct behaviour of each person within the society or group in order to cooperate to reach the common wellness. The International Encyclopedia Of Social Sciences told us that “Ethics is concerned with standards of conduct among people in social groups”3. This is certainly a very wide definition which includes norms and conventions that could be defined as “ethical norms”. As a consequence, it is clear that we are talking about a concept that changes on the basis of the context and of the characteristics of subjects that operate in these circumstances.
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