ETF Watch: Active Socially Responsible Funds Filed

Legg Mason has filed for two ETFs that will combine active management with a socially responsible approach. The funds, the ClearBridge Dividend Strategy ESG ETF and the ClearBridge Large Cap Growth ESG ETF, will be subadvised by Clearbridge Investments, a Legg Mason affiliate that has 25 years of experience managing socially responsible investments based on environmental, social and governance (ESG) criteria.

The ESG portion of the investment approach for both ETFs will evaluate and rate potential holdings relative to their respective sectors based on such qualities as “innovative workplace policies, employee benefits and programs; environmental management system strength, eco-efficiency and life-cycle analysis; community involvement, strategic philanthropy and reputation management; and strong corporate governance and independence of the board,” the prospectuses said.

Both funds will engage in shareholder activism to encourage companies to improve their practices in different ESG areas, the documents noted. They also will use fundamental, bottom-up research to guide their active strategies.

Capitalized On Convergence

The dividend strategy fund will target domestic and foreign equities, but primarily common stocks and mostly from the large-cap segment. From those options, the portfolio managers will aim to select high-quality securities that pay attractive dividends and are likely to grow their dividends. The holdings also are expected to represent companies that have capitalized on the convergence of their investment potential and ESG qualities while achieving consistent risk-adjusted outperformance, the fund’s prospectus said, adding that companies should have strong balance sheets, dominant market positions and reasonable valuations.

Meanwhile, the large-cap growth fund will look to make long-term investments in high-quality and mostly domestic companies that have sustainable competitive advantages, the fund’s prospectus said. The fund’s managers will look for companies where they believe the stock price does not fully reflect the company’s growth potential. In particular, it will seek to identify firms that hold leadership positions in their fields and are likely to grow their market share

The fund’s subadvisor also looks to identify trends that will impact the economy and offer multiyear investment opportunities, leading to compounding earnings and cash flow, the prospectus said. The manager will generally favor self-funding business models and will use stress tests to ensure companies’ profitability and growth are sustainable. Newer companies that are identified as having future growth potential are also eligible for inclusion in the ETF.

The vast majority of ESG ETFs are index-based. The AdvisorShares Global Echo ETF (GIVE) is actively managed, but despite launching in 2012, it has less than $5 million in assets under management. The fund’s managers use ESG criteria in selecting its portfolio.

Both of the proposed ETFs are slated to list on the Nasdaq stock exchange and come with expense ratios of 0.59%. The filings did not include tickers.

Contact Heather Bell at [email protected].