Vanguard has launched a new scrubbed-clean Australian equities fund seeded by NZ passive investment shop, Simplicity.
Andrew Lance, Simplicity chief operating officer, said the manager had tipped in about $100 million to the new Vanguard Australian shares fund that – due to an extreme screen-and-rebalance process – falls outside the global investment giant’s definition of an ‘index’ product.
Lance said the new Vanguard Australian unit trust (AUT) product removes about 40 stocks representing almost a quarter of the top 300 ASX benchmark.
The Vanguard Ethically Conscious Australian Shares Fund brings the ASX portfolio in line with Simplicity’s long list of global equity screens that includes companies involved in fossil fuels, gambling, pornography, military weapons and, now, those contravening the United Nations (UN) Global Compact (which covers breaches of human rights, corruption, labour and environmental standards).
However, given the resource-heavy skew of the Australian share market, the underlying index provider – FTSE Russell – rebalances the new Vanguard fund under rules that caps the portfolio weight of remaining stocks and sectors.
“Otherwise the portfolio would be mostly Australian banks,” Lance said.
Aside from the obvious Australian resource firms such as Rio Tinto, the new fund cuts out gambling companies like TAB and even supermarket giants Coles and Woolworths, which have exposure to alcohol and gaming.
According to the latest Simplicity disclosure document, the “Vanguard Ethically Conscious Australian Shares Fund invests in approximately many of the largest companies and property trusts listed on the Australian Securities Exchange (ASX)”.
Lance said the new Vanguard fund would likely appeal to other Australian and NZ institutions looking for an environmental, social and governance (ESG) approach to the ASX.
Simplicity had worked with Vanguard over the last four years to create the ESG Australian shares fund, he said.
Following recent changes to the underlying FTSE Russell Choice global equity index, the Vanguard Ethically Conscious International Shares Index Fund – which Simplicity uses for offshore equities – also conforms with the UN Global Compact and other ESG negative screens.
Furthermore, after applying tighter fossil fuel definitions its self-managed NZ shares portfolio (which tracks a Morningstar NZX index), Simplicity recently dropped Genesis Energy from its funds.
While Simplicity follows a “mainly passive” investing approach, Lance said the manager would consider other options where “we can improve returns”. For instance, Simplicity has a small exposure to venture capital (through Icehouse Ventures) and a tiny in-house mortgage fund, which manages home loans awarded to certain Simplicity KiwiSaver members.
He said Simplicity would continue to invest in Vanguard AUTs for now as the NZ manager (structured as a charity) was not yet at the scale to develop portfolio investment entity (PIE) versions of its various funds.