(PUB) Investing 2016

9

June 2016

Morningstar FundInvestor

Funds With High Sustainability Ratings The Sustainability Rating applies to all funds where we have sufficient data, not only those with explicit mandates to be “sustainable” or “responsible” investments. We evaluate such funds on the same basis as any other. Our rating confirms that most such funds are indeed doing what they claim: Silver- rated Parnassus Core Equity PRBLX , Bronze-rated Neuberger Berman Socially Responsive NRAAX , and Bronze-rated TIAA-CREF Social Choice Equity TICRX all rate 5 globes and would be good choices for investors looking to incorporate sustainability into their portfolios. The advantage of using these funds is the knowledge that sustainability is an explicit priority that will be maintained over time. Two other funds that base their investing on Islamic principles, but also use ESG factors to build their portfolios, rate 5 globes: Bronze-rated Amana Growth AMAGX and Amana Income AMANX . Such “intentional” options are few and far between, however, representing only about 2% of the fund universe. Our rating helps you sort through the entire universe to find conventional funds that do well on sustainability. Among the M 500 are a number of com- pelling options—funds with strong track records, Analyst Ratings, and Sustainability Ratings of 4 or 5 globes. Many of these funds also have low-risk, buy-and-hold, and high-quality characteristics. Notable examples include the Gold-rated funds managed by the Primecap team; Silver-rated Jensen Quality Growth JENSX ; and Gold-rated Fidelity Low- Priced Stock FLPSX , MFS Global Equity MWEFX , and Artisan International Value ARTKX . If you are interested in incorporating sustainability factors into your portfolio, the Sustainability Rating can help guide you. Because it only measures port- folio holdings, not performance, and is not a forward- looking evaluation of a strategy’s prospects, you’ll need to include traditional metrics and analysis along- side it. As you narrow your universe, though, you’ll be able to find many attractive choices that do well on sustainability and also on traditional measures. K Contact Jon Hale at jon.hale@morningstar.com

Sustainability and Medalist Ratings in the M500

% Œ „

% QQQQQ QQQQ

% QQ Q

% ‰

Sustainability Rating

M500

61.76

5.88

34

67.65

8.82

54.41

7.35

68

55.88

10.29

43.64

11.82

110

55.45

6.36

36.07

13.11

61

42.62

22.95

31.25

25.00

32

34.38

40.63

Data as of April 30, 2016.

company finds itself involved in a serious controversy related to issues such as environmental protection or labor supply-chain management. For the most part, though, ESG analysis identifies companies that are managing their ESG risks and opportunities more effectively over the long term and which therefore may be attractive to buy-and-hold investors. The third trait is a connection with quality management. Companies with forward-looking management teams may be more likely to be effectively addressing long-term sustainability impacts on their businesses. We found support for all three traits among M 500 funds with better Sustainability Ratings. Risk M 500 funds with better Sustainability Ratings are less risky than those with worse Sustainability Ratings. Using the Morningstar Risk rating, which is a relative- to-category measure, we found that 24% of 5 -globe funds had Low Morningstar Risk relative to their cate- gory peers, while only 9% of 1 -globe funds did. Only 12% of 5 -globe funds had High Morningstar Risk, while 19% of 1 -globe funds did. Turnover Low turnover indicates a longer-term, buy-and-hold philosophy among fund managers. M 500 funds with the best Sustainability Ratings have lower turnover than those with the worst ratings. Five-globe funds’ average turnover is roughly half that of 1 -globe funds. Quality Using two measures of quality, one quantitative (return on invested capital) and one qualitative (Morningstar Economic Moat Rating), we found funds with the best Sustainability Ratings also have higher portfolio average ROIC and higher exposure to wide-moat firms.