ESG – Funds
Green is the new gold. There was a time that investors ditched growth assets in favour of precious metals when the world caught a bad dose of economic uncertainty. Now it seems that the strategies adopted in such challenging conditions are changing. With the world facing a deep economic downgrade, investors are running to the safety of gold, judging by the seven-year peak in its value during the pandemic. Yet what is surprising is that investors are also moving into certain equity funds. They have dumped traditional funds, as expected, but are mov- ing some of their cash into sustainable strategies, which seek to not only achieve a financial return but also make positive en- vironmental and social impacts.
These funds, which are also labelled ESG or SRI (socially responsible investing), typically focus on particular strategies, such as low carbon exposure or supporting companies that have diverse management teams. They can also exclude companies from their list of holdings which, for example, make and sell alcohol, cigarettes, weapons or are involved in gambling. Indeed, in the first quarter sustainable funds in Europe report- ed inflows of €30bn (£27bn), according to Morningstar. At the same time investors pulled €148bn (£133.5bn) from Europe’s wider fund universe. Marketing departments supporting fund managers have been telling investors for years that sustainable funds offer down- side protection. This sales pitch was put to the test towards the end of 2018. After years of relative calm, the outbreak of a trade war between US president Donald Trump and his counterpart in China, Xi Jinping, gave the markets their first real turbu- lence since the credit crunch. “Many sustainable strategies were resilient during that period, just as they have been so far this year,” says Oliver MacArthur, senior consultant at Aon. Indeed, more than half of ESG funds have made stronger gains than their traditional counterparts in the past 10 years, accord- ing to research into the performance of more than 700 such funds in Europe. Even the heaviest dose of volatility to hit the markets in 12 years could not disprove the theory that sustainable strategies per- form better in falling markets. SRI funds in the UK All Com- panies sector posted a 21.8% loss in the three months to 20 April, while the wider UK All Companies sector lost 25.6% over the same period. SRI funds even outperformed the FTSE All Share, which dipped by 24%. From an international perspective, SRI Global funds dropped 10.8%. This compares to falls of 13.7% in mainstream global funds and 13.5% by the MSCI World index.
“It was not a surprise to me that sustainable strategies have outperformed so far this year, but the magnitude of the outper- formance over the first quarter was quite startling, in a positive way,” MacArthur says.
30 | portfolio institutional July 2020 | issue 94
It was not a surprise to me that sustainable strategies have out- performed so far this year, but the magnitude of the outperformance over the first quarter was quite startling, in a positive way.
Oliver MacArthur, Aon
Indeed, Margaret Childe, head of ESG Canada at Manulife In- vestment Management, is also seeing evidence of positive per- formance by ESG indices compared to regular benchmarks and notes the continued inflows into ESG funds that are per- forming well. “Although the S&P500 was 11% down we saw ESG funds with that benchmark outperform,” she says. Childe adds that Manulife provides ESG integration to all its clients as they believe it provides a fuller risk-return profile. “We have seen benefits of that approach going into the pan- demic and the market turmoil that followed, which puts our managers in a good position,” she adds. Newton Investment Management’s sustainable strategies are also performing positively against their peers and benchmarks. Its Sustainable Global Equity strategy, for instance, had a good period going into the crisis and has been holding up quite well in the recovery, comfortably outperforming the S&P500. It is a similar story for Peter Walsh, head of Robeco UK, who says that the sustainable versions of the asset manager’s strat- egies have generally performed better than the standard ver- sions across most asset classes. He points to half of the returns
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