As flagged here this August, Russell Investments has formally launched a carbon-lite index-style global equities fund targeting wholesale investors in Australia and NZ.
Seeded with almost $380 million sourced from three Australian clients, the Russell Low Carbon Global Shares Fund claims to half the exposure to carbon emissions and reserves relative to the MSCI All Countries World Index (ex Australia).
James Harwood, Russell portfolio manager, said despite excluding about 4 per cent of the index the new fund has a tracking error of under 30 basis points (bps) and expected annual turnover of between 6-10 per cent – along with a price-tag of 58 bps.
“Turnover is more than the index but much lower than other low-carbon solutions,” Harwood said.
He said the Russell process, which includes a house-built green energy ratio’, focused on both positive and negative tilts within portfolio constraints around asset, sector, industry and country exposures.
“We’re trying to make sure the fund has a low active share,” Harwood said. “This is differentiated from low-carbon optimisation engines that can, for example, deviate by maybe plus or minus 2 per cent from benchmark country weights – our fund looks a lot more like the index.”
Exclusions inevitably play a part in the Russell strategy but he said the concentration of carbon risk in just three sectors – utilities, energy and materials – limits any off-index deviation.
“[Carbon risk] is not a pure factor, it’s highly-skewed to that subset,” Harwood said.
The Russell fund owns about 75 per cent of the approximately 2,400 stocks in the underlying benchmark with a size limit in addition to formal carbon or environmental, social and governance (ESG) exclusions.
“At the lower end [of the MSCI All Countries index] there’s a long tail of about 850 stocks that represent a tiny proportion of the overall index,” Harwood said. “We could own them but there’s a trade-off in higher costs.”
In addition to the almost standard set of exclusions – namely firms involved in tobacco, controversial weapons and uranium production – the Russell fund cuts companies that earn more than 20 per cent of their revenue from “coal-related activities”.
Harwood said more extreme fossil fuel exclusionists – such as the ‘Carbon Underground 200’ list – introduce investment risk without “lowering carbon emissions that much”.
“You need to have a bigger picture approach,” he said, with Russell’s positive tilts to renewable energy and high ESG stocks providing a more future-focused strategy.
For example, the manager’s ‘green energy ratio’ – developed in-house “because no-one else had one” – rates companies on their exposure to renewable energy generation.
Russell also sources third-party research from Trucost, Sustainalytics and Axioma.
“Our strategy will evolve,” Harwood said. “This is a rapidly-changing field and you need flexibility.”
Officially launched on October 10, the Russell low-carbon product has an Australian dollar hedged option.
“We don’t have a NZ dollar hedged version yet but we will add it on if there is demand,” he said.