Five responsible funds to watch in 2024

The economic outlook for 2024 is looking mixed. Central banks are warning that interest rates could stay elevated for longer. This might make it hard for countries and companies that loaded up on debt when rates were lower to meet borrowing costs.

But on the other hand, entry to some markets is looking its most attractive in decades. Now could be a good time to invest for people willing to weather some short-term storms for potential long-term gains.

Although sustainability might’ve slipped down the news agenda last year, it’s not lost any importance. 2023 is likely to be the hottest year on record, the latest in a series of record-breaking temperatures over the last decade.

This is just one of the serious environmental and social challenges we’re facing in the next few years. Funds positioned to weather these issues, and even benefit from them, are likely to do well.

With that in mind, here are five funds to watch in 2024 and beyond.

You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Remember investments should always be made for the long term – that’s at least five years. This article isn’t personal advice. All investments can fall as well as rise in value – you could get back less than you invest. Yields are variable so income is not guaranteed. Past performance also isn’t a guide to future returns. If you’re not sure an investment is right for you, ask for financial advice.

We think higher interest rates make corporate bond markets look attractive entering into 2024. You’re potentially either rewarded with income – from higher-for-longer yields – or growth, as yields fall.

By investing in bonds, the Fidelity Sustainable MoneyBuilder Income fund aims to give a relatively steady income and a small amount of growth, without taking big risks.

Managers Kristian Atkinson and Shamil Pankhania are supported by a highly regarded team of analysts. Time and time again, the team has shown its skills at analysing bond-issuing companies to find the most attractively priced bonds.

The fund adopted a sustainability focused approach in May 2022.

At least 70% of the fund invests in bonds issued by companies with sustainable characteristics, defined by both Fidelity’s proprietary sustainability ratings and external environmental, sustainable and governance (ESG) scores.

The remainder invests in issuers showing improving sustainable characteristics. The managers also engage with these companies to agree improvement milestones and timescales.

The fund excludes companies involved in controversial areas, like weapons, tobacco, thermal coal, and gambling. It also avoids companies violating the UN Global Compact (a UN pact on human rights, labour, the environment, and anti-corruption).

Investors should note this fund can invest in derivatives and high-yield bonds, which adds risk.

The BNY Mellon Sustainable Real Return fund could be part of the backbone for a more conservative portfolio or add diversification to a more adventurous portfolio.

The team behind this fund aim to make money in a variety of market conditions. They do this using a mix of investments, mainly falling into two camps.

The first is the ‘return-seeking core’. Investing in assets the team think will provide long-term growth, like shares and bonds from well-run, financially secure companies with unique advantages over the competition.

The rest of the portfolio is called the 'stabilising' layer. This invests in government bonds, commodities, and cash, with the aim to add stability to returns. The managers can change the amount invested in each section of the portfolio depending on their view of the world.

The fund’s sustainable ‘red lines’ mean companies violating the UN Global Compact Principles, and those incompatible with limiting global warming below 2°C aren’t even considered. It also won’t invest in any company that makes more than 10% of its revenues from tobacco and other sectors some investors might consider unethical.

Investors should note this fund can invest in derivatives, high-yield bonds, smaller companies and emerging markets. These factors add risk.

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Five funds to watch for 2024

Emma Wall

Head of Platform Investments

A global ESG tracker fund could be part of the backbone for lots of responsible portfolios.

The Legal & General Future World ESG Developed Index aims to track the performance of the Solactive L&G ESG Developed Markets Index. It’s made up of about 1,400 companies based across the world, which is currently focused on sectors like technology, pharmaceuticals, and financials.

The index adds or lowers investment in companies based on how they score on various ESG criteria. From the level of carbon emissions to the number of female board members and the quality of disclosure on executive pay.

It avoids investing in companies involved in controversial weapons, and those with significant involvement in tobacco, civilian firearms, thermal coal and oil sands. Likewise, for continuing violators of the UN Global Compact Principles. The fund also aims to reach at least a 7% reduction in carbon emissions per year until 2050.

The UK is a world-renowned income market, which means there are some good UK-focused income funds with responsibility in mind.

Janus Henderson UK Responsible Income aims to provide a good level of income with capital growth over the long term. Andrew Jones has been at the helm since January 2012, and has almost 25 years of experience managing UK equity income funds.

The fund doesn’t invest in areas some investors consider unethical, like alcohol, armaments, gambling, non-medical animal testing, nuclear power and tobacco.

Fossil fuel power generation is also out. However, companies generating power from natural gas can be allowed if their strategy includes clear plans for transitioning to renewable energy.

All investments must be compliant with the UN Global Compact. The focus is on large and medium-sized companies, but the manager does have the flexibility to invest in higher-risk smaller companies too.

At the time of writing, the fund yields 4.5%, but remember income isn’t guaranteed and yields aren’t a reliable indicator of future income. The fund takes charges from capital, which could boost the income, but reduces the potential for capital growth.

Asian and emerging markets have the potential for greater long-term returns, but they’re riskier than developed ones. Investments here should usually only form a small part of a well-diversified portfolio.

Legal & General Future World ESG Emerging Index aims to replicate the performance of the Solactive L&G Enhanced ESG Emerging Markets Index.

This fund gives broad exposure to emerging markets by tracking the Solactive L&G Enhanced ESG Emerging Markets Index. The index is made up of almost 1,500 companies from a range of countries including Taiwan, India and China.

Like all Legal & General Future World funds, this fund invests more in companies that score well on various ESG criteria and less in companies that don’t.

The fund also avoids persistent violators of the UN Global Compact Principles or those involved in controversial weapons, tobacco or civilian firearms. Companies that generate more than a fifth of their revenues from thermal coal or oil sands are also out.

On top of this, the fund adopts a decarbonisation pathway. This means it aims to reduce emissions by 7% per year until 2050.