Older ESG Funds Outperform Their Newer Rivals in Market Tumult

(Bloomberg) -- ESG investment funds with longer track records are outperforming their newer rivals in the most tumultuous markets since the 2008 global financial crisis.

Of the more than 2,800 ESG-themed funds tracked globally by Bloomberg, about 400 were in positive territory for the year before Friday’s stock market rebound. There were 45 funds that have managed to hold onto gains of more than 10% year-to-date and more than 70% of those funds opened before 2015.

This year’s top performers, as of Thursday, were the 12-year-old Martin Investments Eco Investing and 10-year-old Ari Global Opportunities — both separately managed accounts that are up almost 40% so far this year, buoyed by big positions in health-care, pharmaceuticals and technology stocks, according to data compiled by Bloomberg. 

“Potential for outperformance may be related to the longer-term nature of good ESG integration,” said Erika Karp, founder and chief executive officer of Cornerstone Capital Group, which oversees more than $1 billion for clients.

 The market for funds that focus on environmental, social and governance investment principles has ballooned in recent years with more than 1,000 opening since 2015. The increase means most ESG funds now find themselves in uncharted territory as markets crater. The funds fell by an average 12.2% this year as of Thursday, compared with the 23.2% slump of the Standard & Poor’s 500 Index, according to Bloomberg data. Parnassus Core Equity, the largest ESG-focused fund in the U.S. with about $17 billion of assets, has declined 21.2%.

Older ESG Funds Outperform Their Newer Rivals in Market Tumult

Managers of sustainable funds have long said they can use ESG factors to limit risks in their portfolios. They are often heavily invested in technology and health-care stocks and they typically have little or no holdings in fossil-fuel companies, which have plunged in value as oil prices fell the most since the Gulf War of the early 1990s. At the same time, they tend to be underexposed to heavy-polluting companies such as cruise-line operators and airlines.

Carnival Corp., Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. have seen their market values crushed this year because of the coronavirus, while airlines from Qantas Airways Ltd. to American Airlines Group Inc. have suffered from  record declines in customer demand.

“Every time we go through a significant change in oil prices, be it up or down, it increases the case for developing non fossil-fuel methods of generating energy,” said Cheryl Smith, a money manager at Trillium Asset Management in Boston.

Trillium managed $3.2 billion at the end of last year. The Trillium Large Cap Core strategy, which is a separately managed account, has lost 9% this year.                                 

About a third of the 303 U.S. sustainable funds tracked by Morningstar Inc., managing a combined $140 billion, are less than 10 years old and, so far, the funds are weathering the stock market slump better than traditional equity funds. For the year through March 10, about 41% of ESG funds are ranked in their category’s top quartile, while only 11% are in their category’s bottom quartile, according to Chicago-based Morningstar.

“ESG funds, as they mature, are becoming pretty good all-weather funds,” said Jon Hale, head of sustainability research at Morningstar.

Technology and Health Care

Some of this year’s top-performing ESG strategies have bet heavily on technology and health-care stocks like Microsoft Corp., Becton Dickinson and Thermo Fisher Scientific Inc. Shares of these companies have outperformed as the virus has led to more people working from home and seeking health advice online.

Shares of Zoom Video Communications Inc., whose videoconferencing technology is being used in lieu of travel or in-person meetings, rose to a record this month. Teladoc Health Inc. also reached an all-time high. The company offers health-care services through phone and video consultations.

“The real benefit in times like this is allowing telemedicine to take some of the strain off the health-care system and people out of the clinics and emergency rooms,” said Nolan Ritcey, senior research associate at Domini Impact Investments, which holds shares of Teladoc. The Domini Impact Equity Fund has declined 20% this year.

Investors in ESG funds haven’t been scared away by the market slump, at least not yet. Net inflows into exchange-traded ESG funds were $1.4 billion last week, according to Bloomberg data. ESG ETF’s are down by an average 19.4% so far in 2020, based on a group of about 300 sustainable ETFs tracked by Bloomberg.  

However, “a sustained, broad-based market downturn would test investor resolve on ESG commitments,” said Lawrence Heim, director of partnerships at the Responsible Business Alliance, which works with companies to incorporate ESG into their supply chains. 

©2020 Bloomberg L.P.

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