These Low-Turnover Medalist Funds Are Sustainable, Too

Although there's a healthy contingent of Morningstar.com readers who don't give a hoot about sustainability (to whom I say, channeling my mom, "Just ignore it!"), a growing share of investors do care about how their investments stack up on environmental, social, and governance fronts. Not only have the number of investment offerings dedicated to ESG principles multiplied over the past decade, but ESG assets under management also have catapulted in value. The assets under management dedicated to sustainable investing scaled $21 trillion in 2014, according to the Forum for Sustainable and Responsible Investment, and that number has likely climbed higher still over the past few years.

In recognition of the fact that a growing share of investors look for investments that reflect their sustainability concerns, the Morningstar Sustainability Rating for mutual funds and other managed products launched this year. The ratings aim to go beyond the relatively small subset of funds that have specific mandates to invest in accordance with sustainable or socially responsible principles; instead, they rate all funds based on how the companies in their portfolios stack up on ESG metrics. An external firm, Sustainalytics, evaluates companies based on ESG metrics, then Morningstar calculates a Portfolio ESG Score, subtracting points from that score based on whether the firms in the portfolio have been embroiled in controversies that could have a negative impact on society, the environment, or the companies themselves. The net score is the portfolio's Sustainability Score; those scores are then stacked up relative to other funds within each category, resulting in a rating. Funds with the highest sustainability scores relative to their peer groups receive 5 globes, while those with the lowest receive 1. Investors can click here to read more about the methodology.

Because the sustainability ratings are based on the portfolio itself rather than a fund's management or the role, if any, of ESG factors, in its process, it's a leap to suggest that a fund that has a high sustainability ranking within its peer group today will always have one. However, if a fund has a high sustainability score and also has low turnover, that provides greater potential stability of the sustainability score. (Bear in mind that low turnover plus a good sustainability score is not a guarantee that a fund will always be ESG-friendly, however; management could change, thereby changing up the portfolio, and holdings that look good from an ESG standpoint today may not always.)

This week, let's take a look at some of the medalists with very high ESG scores as well as turnover rates of 25% or less. All of the following funds receive 5-globe ratings and analyst ratings of Bronze or higher.

Jensen Quality Growth

JENSX

Category: Large Growth Analyst Rating: Silver Turnover Rate: 14%

Although this fund doesn't have an explicit ESG mandate, it currently receives the highest sustainability score of any medalist fund. And barring radical downgrades in the ESG scores or new controversies related to its holdings, the fund's low turnover suggests that it's likely to retain a high sustainability rating for the foreseeable future. Management trains its sights on companies that have generated returns on equity of 15% or better in each of the past 10 years, a screen that keeps its focus squarely on highly profitable, noncyclical mega-cap businesses. It's worth noting that performance can be streaky, at least in relative terms; while near-term performance has been red-hot, it has lagged in several years during the current market recovery. Nonetheless, the fund's mellow profile has kept investors in their seats; its 15-year investor returns are identical to its total returns.

Vanguard PRIMECAP

VPMCX

Category: Large Growth Analyst Rating: Gold Turnover Rate: 9%

This closed fund landed near the top of the heap on sustainability among Morningstar's medalist funds, but other Primecap-managed offerings were prominent on the list, too, including

.

Amana Income

AMANX

Category: Large Blend Analyst Rating: Bronze Turnover Rate: 0%

Both this fund and Bronze-rated sibling