Just one ESG-focused fund has maintained top-quartile performance in 2021 and 2020 as the sustainability theme has faced a headwind from the market rotation.
Sustainable and ESG (environmental, social and governance) strategies generally saw strong outperformance in 2020 despite the highly volatile market. This was complemented by some of the highest inflows the market had seen into portfolios that prioritised solutions to environmental and social issues.
According to global funds network Calastone, ESG funds accounted for more than half of all flows into active equity funds in 2020.
Part of this outperformance was driven by the growth bias of ESG and sustainable portfolios, which outperformed up until the end of last year. However, with the exception of GS ESG-Enhanced Global Multi-Asset Balanced Portfolio, all ESG funds that were top-quartile in their sector in 2020 have failed to maintain this outperformance year-to-date.
According to Ben Yearsley, this reversal of fortunes is down to the value rotation rather than a change in investor sentiment about the sustainability theme.
“Don’t forget sustainable and sustainable ESG find their natural bedfellows in quality growth,” Yearsley said.
“Value tends to be old-school industry and sectors that are too ‘messy’ to invest in. Value also has lots of commodity stocks – look at how well the likes of BHP and Rio Tinto are doing and how much cash they are throwing off.
“Oil is the other area – the price is up 5 per cent or thereabouts in 2021 and whilst the share prices of BP and Shell haven’t done quite so well, they’ve still been in demand.
“Putting it simply, ESG and sustainable will almost always underperform a value rally as they can’t or won’t invest in many of the stocks. It may put some investors off who bought into sustainable last year, who maybe thought it was a one-way bet after almost a decade of growth dominance.”
GS ESG-Enhanced Global Multi-Asset Balanced Portfolio, run by David Copsey and Shoqat Bunglawala, made a total return of 8.8 per cent in 2020 and 7.2 per so far in 2021.
Source: FE Analytics
The fund, which operates in the IA Mixed Investment 20-60% Shares sector, applies traditional ESG exclusion criteria, avoiding companies that profit from or have direct engagement with controversial weapons, thermal coal, oil sands, Artic oil and gas, palm oil, tobacco, civilian firearms, gambling, for-profit prisons or predatory lending.
Its main exposure is currently in global equities, making up 45.1 per cent of the portfolio. Second is high-quality fixed income, making up just over 35 per cent of assets.
More than 50 funds which were top quartile in their sector in 2020 have fallen to the bottom quartile for 2021 so far.
Source: FE Analytics
Among the most notable casualties were the first- and third-best active sustainable equity funds last year: Baillie Gifford Positive Change and Baillie Gifford Global Stewardship, both of which apply Baillie Gifford’s growth bias.
The £2.8bn Baillie Gifford Positive Change fund, run by Kate Fox and Lee Qian, made a total return of 80.1 per cent last year. Year-to-date it is still up 11.4 per cent.
It invests in 25 to 50 companies that deliver a positive change in one of four themes: social inclusion and education, environment and resource needs, healthcare and quality of life, and ‘base of the pyramid’ – addressing the needs of the world's poorest populations.
The Baillie Gifford Global Stewardship fund applies an ESG exclusion to ‘sin sectors’ to mitigate ESG risk. It invests in companies that its managers feel have a net social benefit and balance the interests of stakeholders while exhibiting a responsible company culture.
Breaking up the Baillie Gifford pair last year was Guinness Sustainable Energy, which has made a total return of 11.4 per cent year-to-date.
Managers Jonathan Waghorn and Will Riley run a 50 per cent top-down, 50 per cent bottom-up approach. The pair focus on sustainable energy, which they believe is set to benefit from the compounding effects of strong demand growth and improving economics of renewable energy supply, along with overall support for lower carbon technologies.
Staying in the renewable energy space and the biggest individual drop in performance came from a passive fund, the iShares Global Clean Energy UCITS ETF. It made the highest overall returns among ESG and sustainable portfolios last year, 132.8 per cent. But so far this year, it has made a loss of 17.5 per cent.
The upending of ESG and sustainable funds’ performance demonstrates that this style of investing isn’t always accompanied by strong returns.
As Danni Hewson, financial analyst at AJ Bell, pointed out: “ESG might be ‘en vogue’, but sustainable credentials don’t guarantee success.
“In fact, it’s becoming harder than ever to stand out from the crowd, with the latest victim being the Liontrust ESG Investment Trust IPO which has recently been pulled.
“Market conditions are proving challenging right now, with so much competition as fund houses fight for elbow room, and even more so for those looking to raise funds. Greenwashing and disputes over what actually merits the ESG badge can leave investors confused about where to turn if they want to put their savings to good causes.”
Liontrust Asset Management has been a long-term proponent of sustainable investing, with several of its sustainable portfolios over a decade old.
But the group’s growth bias has meant eight of its portfolios have gone from top to bottom quartile in their sector.
These include Liontrust Sustainable Future Global Growth, Liontrust Sustainable Future UK Growth and Liontrust Sustainable Future Managed, which are all headed up by Peter Michaelis with Simon Clements.
Other well-known funds that are bottom quartile for 2021 include Janus Henderson Global Sustainable Equity, Pictet Clean Energy, Ninety One Global Environment, Trojan Ethical, Pictet Global Environmental Opportunities and Rathbone Greenbank Global Sustainability.