Nikko Asset Management has converted a long-standing NZ equities socially responsible investment (SRI) institutional strategy into a retail-ready fund.
The new SRI Equity Fund feeds into a local shares portfolio the manager has run for about 20 years, according to Nikko NZ chief, George Carter.
Carter said the SRI fund – available as a single sector option for Nikko KiwiSaver and other investors – adds a further layer of scrutiny above the general environmental, social and governance (ESG) criteria that apply to all of the manager’s products.
“We consider ESG and SRI as different,” he said.
Under the SRI constraints, the Nikko fund excludes companies that derive 10 per cent or more of their revenue from the classic ‘sin’ sectors including alcohol, tobacco and fossil fuel extraction.
But the NZ share market presents some definitional issues for SRI-conscious investors, Carter said, with the Global Industry Classification Standard (GICS) used to tag companies to sectors in larger developed markets proving more difficult to apply here.
“For instance, no NZ listed companies fall under the GICS tobacco sector but some of them do get significant revenue from it,” he said.
In fact, the cigarette-sales attributed to Z Energy put the company more at risk of exclusion on SRI grounds than its core petrol-pumping business, Carter said.
“Most SRI fossil fuel exclusions are based on extraction not use,” he said.
For now Z Energy remains in the Nikko SRI portfolio but the stock is on-watch for its potential to exceed the 10 per cent revenue threshold from tobacco.
In practice, the casino operator, Sky City, is the only major exclusion in the SRI fund compared to the core Nikko NZ shares fund.
However, the two portfolios will deviate in composition due to reweighting priorities and the ability to include off-mandate Australian stocks.
While the differences might be subtle, Carter said there was growing investor demand for SRI-labeled funds.
The Nikko diversified funds (including the KiwiSaver suite) will continue to allocate to the core NZ shares strategy, leaving the SRI options as single-sector choices for investors.
Following the launch of the SRI fund, Nikko now offers 20 retail products including the recently released Freedom Fund and the Ark Disruptive Innovation Fund as a stand-alone strategy late in 2019 (later extended to the Nikko KiwiSaver scheme).
The Nikko diversified balanced and growth funds (also used in its KiwiSaver scheme) allocate a respective 3 and 6 per cent to the Ark fund. Globally, Nikko owns 15 per cent of Ark.
Ark has come under pressure of late after dropping about 20 per cent last year and extending losses in the volatile start to 2022.
Most of the 1,300 or so Nikko KiwiSaver investors in the Ark fund would be under water given the option opened up close to the peak: the Disruptive Innovation Fund gained about 150 per cent in 2020, surging in performance and massive flows post the COVID crash in March of that year.
Despite the performance shock, Carter said most of the Nikko KiwiSaver Ark investors had held steady with some “rebalancing” into diversified funds in the scheme.
“We’ve seen both inflows and outflows [to Ark],” he said – albeit with a slight tilt to net outflows.
Nikko also retains its diversified funds target Ark allocations, Carter said, rebalancing as cashflows come in.
“Obviously, we’re not pleased to see the performance but Ark has behaved in ways that we thought were possible,” he said. “We’ve always talked about the importance of diversification in a portfolio. And for investors who believe in the long-term rationale of Ark, the short-term performance should not change those beliefs.”
As at the end of December, the Nikko NZ Ark fund – which feeds into a Luxemburg-domiciled vehicle – reported almost $84 million under management.
The Nikko Ark strategy also employs ‘swing pricing’- a flexible buy-sell pricing option that varies according to underlying trading conditions.
“As a consequence of the application of swing pricing, the volatility of the Underlying Fund’s NAV [net asset value] may be higher than the volatility of the Underlying Fund’s portfolio,” the Nikko disclosure document says.