SBI Magnum Equity ESG Fund: Strong performance in volatile markets

SBI Magnum Equity ESG Fund is a thematic equity fund which invests in companies based on environmental, social and governance (ESG) criteria. Environmental criteria includes among other parameters, carbon footprint, energy use (renewable and non-renewable) and conservation, pollution control, waste management etc. Social criteria include employee, supplier and customer relations. A company's relationship and engagement with local communities are also taken into consideration. Governance refers to corporate governance track record, financial integrity, internal controls, regulatory compliance, audits and shareholder rights, particularly interests of minority shareholders. ESG is becoming an increasingly popular theme with global investors with a significant proportion of global assets under management (AUM) allocated to this theme.

About SBI Magnum Equity ESG Fund

The scheme was formerly known as SBI Magnum Equity Fund and was initially launched in 1991. The scheme name got changed to SBI Magnum Equity ESG Fund in 2018. The scheme has Rs 2,350 Crores of AUM with an expense ratio of 2.28% for the regular plan. Nifty 100 ESG TRI is the benchmark index of this fund. The scheme has performed exceedingly well in the last 1 year, a challenging period for the stock market in India. The chart below shows the growth of Rs 1 Lakh investment in SBI Magnum Equity Fund versus its benchmark index Nifty 100 ESG TRI over the last one year (ending 2nd October 2019).

Source: Advisorkhoj Research

In the last one year (ending 2nd October 2019), the scheme gave more than 12.2% return beating the benchmark index (Nifty 100 ESG TRI) which gave only 5.3% return. Interestingly, over this same period Nifty 50 TRI gave just 4.5%. Two important points to note are that, the ESG benchmark beat the market benchmark and that, SBI Magnum Equity ESG Fund was able to create substantial alphas for investors in volatile market conditions. The chart below shows the growth of monthly Rs 10,000 SIP in the scheme over the last 12 months. The scheme gave 11.87% annualized SIP returns (XIRR) versus the benchmark XIRR of 3.43%.

Source: Advisorkhoj Research

Monthly Rolling Returns

The chart below shows the monthly rolling returns of the scheme versus the benchmark (Nifty 100 ESG TRI) over the last 1 year. You can see that the scheme outperformed the benchmark in most months, both during up market months and down market months. This kind of consistency is a testimony of good stock selection by the fund manager of this scheme. Though past performance is not an indicator of future performance, rolling returns performance of SBI Magnum Equity ESG Fund versus its benchmark in the prevailing market conditions provides a useful insight of the potential of this scheme from the perspective of alpha generation for investors.

Source: Advisorkhoj Research

Investment Strategy

• SBI Magnum Equity ESG Fund invests in companies following the Environmental, Social and Governance (ESG) criteria


• Companies are scored across parameters from Governance, Social & Environmental aspects of the company’s management of its affairs


• Active weights of a security are determined by the ESG scores. A positive score will enable a positive active weight, and vice-versa


• The scheme invests 80-100% in equity & equity related instruments following ESG criteria and 0-20% can be invested in other equities and/or debt & money market instruments

Portfolio Construction

The scheme has a large cap bias; nearly 92% of the assets are invested in large cap stocks (Top 100 stocks by market cap). From an industry sector viewpoint, banking and finance has the largest allocation of nearly 40%, followed by IT (12%) and consumer non-durables (9.8%). Petroleum products, cement and construction, automobiles and pharmaceuticals are also among the top 10 sectors in the scheme portfolio. The scheme portfolio is fairly well diversified in terms of company concentration.

ESG creates shareholder value

Though the ESG theme is sometimes presented as the latest fad in investing, ESG in essence is about sustainable business models. Many fund managers we have interviewed in the past have stressed the importance of selecting stocks which provide visibility into earnings growth and have sustainable business models. Earnings growth visibility and sustainable business models are also interrelated. The ESG theme is a structured way of understanding major risks that can impact companies’ earnings. Environmental factors like pollution control norms e.g. emission norms can impact revenues and earnings of companies. Customer and employee relationships can impact brands and share prices. Similarly regulatory risks can impact revenue and earnings. A strong ESG scorecard is representative of the quality of management which fund managers put a lot of importance on.

There is a lot of research which suggests that the ESG theme creates additional shareholder value. The chart below shows the 3 and 5 year returns of Nifty 100 ESG TRI versus Nifty 100 TRI. You can see the outperformance of the ESG theme. As per an Economic Times article (June 2019) more than 1,900 large institutional investors have signed up for the theme of ESG sustainability and the around $22 Trillion dollars of assets are aligned with the ESG theme.

Source: Advisorkhoj Research

Summary

In this blog post, we discussed the concept of ESG theme in investing. While this theme is getting increasingly popular with global investors, you can relate it with fundamental valuation factors like competitive advantage, sustainable business model, quality of management and return on capital employed. SBI Magnum Equity ESG Fund, a thematic fund based on ESG sustainability principles, has delivered strong returns in the last 1 year. The scheme itself before getting renamed has a long performance track record. In our view, investors should have a long term investment horizon in this scheme. You can invest in this scheme either in SIP or lump sum depending on your financial situation and needs. You should consult with your financial advisor if SBI Magnum Equity ESG Fund is suitable for your investment needs.