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6 Funds That Deliver the Best of Both Worlds

6 Funds That Deliver the Best of Both Worlds

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar recently introduced the Morningstar ESG Commitment Level, which allows investors to pinpoint the extent to which funds incorporate environmental, social, and governance considerations into their investment processes. Joining me today to unpack this new metric and to talk about a few highly rated funds that score well on this new measure is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thanks for joining me today.

Russ Kinnel: Glad to be here.

Dziubinski: Russ, first tell us a little bit about the Morningstar ESG Commitment Level--what it is and what it measures.

Russ Kinnel: Sure. So, I'll start by prefacing it by saying that it's not at all related to the Analyst Rating. The Analyst Rating is a forward-looking performance prediction, whereas ESG purely measures a fund's commitment to ESG principles. So, we look at how much do ESG principles impact the portfolio, are the managers advocates, what are the resources to support the ESG efforts of a fund? We look at all those things, and we rate a fund from low to high. So, there's Low, Basic, Advanced, and High [Leader].

Dziubinski: And then, in the most recent issue of FundInvestor, you took a look at some funds that have high Morningstar Analyst Ratings and also have high Morningstar ESG Commitment Levels. Let's talk a little bit about some of those. One fund from the list is Vanguard Global ESG Select Stock VESGX. Tell us a little bit about that one.

Russ Kinnel: This is a new fund but really promising. Launched in 2019, it's a world large-stock blend fund run by Wellington. And Wellington really has the depth both on the ESG side and the fundamental research side to make a fund like this work. They look for good stewards but also with good returns on capital. And of course, you have a nice Vanguard expense ratio of 43 basis points. So, ESG is very affordable right now.

Dziubinski: And there are a couple of funds on your list from TIAA-CREF, TIAA-CREF Social Choice Equity TICRX and TIAA-CREF Core Impact Bond TSBIX. They are both on the list. Tell us about those.

Russ Kinnel: That's right. Well, their history of running pensions for teachers means TIAA-CREF has been doing various ESG-like strategies for a very long time. Social Equity is a fund that's been around since '99, and it's a very diffuse portfolio that screens on good ESG characteristics but still has a lot of holdings. The Social Impact Bond is really interesting one. Bonds are a newer field for ESG. And what really makes this one interesting is that 30% of the portfolio are meant to be impact bonds. So, by that, that means smaller issues specifically meant to support things like an environmental cause, a social cause, a governance cause, so something that really moves the needle. It's kind of an unusual fund, but we really think it's promising.

Dziubinski: Lastly, three funds from Parnassus made the list. Walk us through a little bit about Parnassus' approach to ESG investing, and of course, let us know what the three funds are that made the list.

Russ Kinnel: Sure. So, Parnassus has been doing this since 1984, where they have been screening based on ESG characteristics. Obviously, those characteristics have evolved. But really, a strong emphasis on sustainability, and of course, on the fundamental side, they also look for sustainably high returns on equity. And so, we really like them both from an ESG and a fundamental perspective. So, there's Parnassus Core Equity PRILX, Parnassus Mid Cap PFPMX, and Parnassus Mid Growth PFPRX. We think all three are an intriguing mix.

Dziubinski: Russ, thank you so much for your time today for helping walk us through this new lens from Morningstar and giving us some fund ideas, too. We appreciate it.

Russ Kinnel: You are welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

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About the Author

Russel Kinnel

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Russel Kinnel is director of ratings, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He heads the North American Medalist Rating Committee, which vets the Morningstar Medalist Rating™ for funds. He is the editor of Morningstar FundInvestor, a monthly newsletter, and has published a number of prominent studies of the fund industry covering subjects such as manager investment, expenses, and investor returns.

Since joining Morningstar in 1994, Kinnel has analyzed virtually every type of fund and has covered the most prominent fund families, including Fidelity, T. Rowe Price, and Vanguard. He has led studies on the predictive power of fund data and helped develop the Morningstar Rating for funds and the Morningstar Style Box methodology. He was co-author of the company's first book, Morningstar Guide to Mutual Funds: 5-Star Strategies for Success (Wiley, 2003), and was author of the book Fund Spy: Morningstar's Inside Secrets to Selecting Mutual Funds That Outperform, published in 2009.

Kinnel holds a bachelor's degree in economics and journalism from the University of Wisconsin.

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