Do-good funds did better than benchmarks amid selloff

ESG-oriented strategies have benefited by evading COVID-19 headwinds and addressing key risks

Do-good funds did better than benchmarks amid selloff

While most equity funds were hit by coronavirus-influenced selloffs in the first quarter, funds that followed ESG strategies have held up better, posting smaller declines than their non-sustainable peers.

Citing data from FactSet, the Wall Street Journal reported that nearly 60% of the largest U.S. sustainable and ESG mutual funds and ETFs lost less in market value than the S&P 500. Similarly, data gathered by UBS Asset Management has found that ESG versions of both developed- and emerging-markets indexes did better than their benchmark parent indexes.

“[T]he socially responsible version of the MSCI World Index brought 2.03 percentage points in excess return compared with the broader market [from February 20 to March 30],” the Journal said, citing the UBS data.

Morningstar data also revealed that in spite of the broad decline in valuations, sustainable funds in the U.S. absorbed a record US$10.5 billion in investor inflows.

Because a considerable proportion of ESG indexes were introduced after the 2007-09 financial crisis, most ESG funds are relatively new, making the recent coronavirus selloff their first trial by fire. But sustainable-investment experts are quick to downplay findings of their relative outperformance, as a three-month window is too short for broad conclusions to be made about the long-term strategies.

To be sure, one driver of the recent outperformance appeared to be a fluke. U.S. ESG funds tend to underweight in the energy sector, which has suffered because of massive demand deterioration in fossil fuels amid government-imposed lockdowns around the world.

The top performers for the period include the US$3.6-billion Calvert Equity Fund which invests in large-caps with strong cash flows and high returns on capital while excluding fossil-fuel reserve companies and tobacco.

Another is the Brown Advisory Sustainable Growth Fund, which has outperformed both its benchmark Russell 1000 Growth Index and the S&P 500 so far in 2020. One of its portfolio managers, Karina Funk, highlighted three risks they watch that have been exposed by the pandemic: how companies manage their workforce, how they support their customers, and how they keep innovating amid turbulence.

“We expect our companies to be making the right investments during this downturn so that they can come out stronger and even take market share when we start getting closer to a new normal for business,” Funk told the Journal.


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