Ethical funds have failed to beat non-ethical portfolios over the past year, according to data from Moneyfacts, and investors have responded by selling out.
Over the past year, environmental, social and governance (ESG) funds made a total return of 4%, compared with a 6% gain for non-ethical portfolios.
Despite a tough year, ethical funds tend outperform over the long term, beating their non-ethical counterparts over three, five, 10 and 15 years.
Source: Moneyfacts
This was not the case in every sector – non-ethical funds won in the corporate bond space and among global funds – but the trend held true for multi-asset and UK portfolios.
Overall, over the past year 19 ethical sectors out of 26 made a positive return, compared with 18 non-ethical sectors.
Rachel Springall, finance expert at Moneyfacts.co.uk, said it was encouraging that ESG funds had made a positive return overall, as many consumers choose on principle to invest in ethical funds. However, she added there was some concern that they had failed to beat their non-ethical peers.
“The outlook for the stock market is uncertain, so any concerned investors would be wise to seek advice before switching out of any fund sector, as a jumpy premature move may result in missing out on potential recovery.”
Emma Wall, head of investment analysis & research Hargreaves Lansdown said investors had voted with their feet in recent months.
Among customers of the UK’s largest fund-buying platform, ethical fund flows fell 115% in January 2022 compared with the previous year. It was the first time investors had sold more ethical portfolios than they had bought since March 2020.
“There was significant market volatility in January as fears of a Federal Reserve rate rise cooled the appeal of growth stocks,” she said.
“The Nasdaq index of US tech stocks recorded its worst month since the pandemic slump in March 2020, as investors took gains and instead sought out stocks such as financials, which tend to benefit from higher interest rates. ESG funds were caught up in the style rotation as the appeal of growth-orientated names waned.”
However, she said that “before sounding the death knell for responsible investing” investors should consider the context of the recent performance.
January 2021 was a record-breaking month for flows into responsible funds on the Hargreaves platform – so January 2022 always had a high bar to beat.
Meanwhile, choppy markets last month hit fund flows across all sectors, as investors sought to make sense of the higher-rate outlook.
“The increased popularity of responsible investment funds will be a structural shift, rather than a faddy trend, and while there may be months where flows slow, assets under management are likely to grow steadily over time,” she said.
For investors that do want to buy ethical funds, in spite of the tough year, interactive investor (ii) collectives specialist Kyle Caldwell said the most popular ethical fund with interactive investor ISA customers so far this tax year has been Baillie Gifford Positive Change.
Source: interactive investor
“I’m interested to see whether it maintains its place at the top of the table in the next couple of months,” he said, as the fund has been hit hard by the market rotation away from growth stocks and into cheaper value names.
This affected a number of ESG funds last year, as many sectors that fit well in the space, such as technology and healthcare, dived as investors factored in higher interest rates.
Rebecca O’Connor, head of pensions and savings at ii, said: “However, some investors may feel that the values among funds in this area, having fallen, now look attractive again.”
iShares Global Clean Energy UCITS ETF has been the second-most bought ESG fund over the past year while six of the top 10 are investment trusts, many with a focus on renewable energy infrastructure.
While ‘real assets’ such as infrastructure are often seen as a way of protecting against rising prices, the popularity of these trusts pre-dates the current ‘red hot’ inflationary environment, and yield could well be a key driver, she added.