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Revealed: the top ESG funds and managers from around the globe

Revealed: the top ESG funds and managers from around the globe

Citywire research discovered that ESG mirrors of existing funds outperformed their peers during the worst of the March market downturn and the momentum for sustainability-minded funds remains strong.

Citywire Selector looked more closely at the strategies of outperforming funds considered sustainable by Morningstar last month, with many offering a tech leaning or an emphasis on specific sub-sectors of the market.

But is this a universal experience or solely the case for strategies available to pan-European investors? Here, Citywire’s international editors share how the scenario has unfolded in their markets. Jump to:

USA

Alex Steger, Editor, Citywire USA

The following list highlights three notable ESG funds in the US market, either for their size, scale or outperformance in this growing area of investor interest.

Vanguard FTSE Social Index

AUM: $6.4bn

The best-performing ESG fund in Morningstar’s ESG universe in 2019, the fund returned 33.96% for the year, beating the S&P’s 31.49% and 93% of the 1,387 funds in its Large Blend category, the vast majority of which are, obviously, not ESG products.

The fund is an increasingly rare type of ESG strategy in that it screens out controversial stocks – fossil fuels, tobacco, porn, etc. – rather than scoring companies on their E, S and G bona fides. It does exclude those companies that do not promote diversity but has no wider corporate governance filter.

An index fund, it tracks the FTSE4Good US Select index, which begins with a universe of US large- and mid-caps before screening as above. The remaining positions are then market-cap weighted. It hit headlines in 2019 when the Wall Street Journal highlighted how it still held Occidental Petroleum, which in 2015 had settled a case related to allegations of polluting the Amazon. The index was subsequently updated.

Parnassus Endeavor

AUM: $2.8bn

The fund is not explicitly labeled as ESG but is widely regarded as one of the oldest such strategies in the US. The fund is run by veteran value investor Jerome Dodson, who founded San Francisco-based Parnassus Investments in 1984 with the aim of investing in companies with ethical business practices.

His ESG approach developed from his friendship with financial journalist Milton Moskowitz, author of 1978’s ‘The 100 Best Companies to Work for in America,’ who went on to compile Fortune’s annual listing of the best employers. When Russell Associates studied Moskowitz’s list, discovering that the companies on it had substantially outperformed the market, Dodson had the facts to back up his hunch. ‘I always thought good workplaces would make good investments, but I didn’t have any proof,’ he told Citywire in 2017.

Long-term performance of the fund has been stellar -- for the 10 years up to February 2017, it returned 218%, the only fund in its Lipper category to breach 200%. But the last three years have been poor, with the fund lagging its peers for most of this time.

TIAA-CREF Core Impact Bond

AUM: $5.1bn

The sustainable fund with the most inflows for 2019 was the-now $5.1bn TIAA-CREF Core Impact Bond fund, which took in $1.8bn in 2019. The fund changed its name in March, having previously been called the TIAA-CREF Social Bond fund.

The fund is run by Stephen Liberatore, Joseph Higgins and Jessica Zarzycki and not only invests according to ESG criteria but also allocates a portion of its portfolio – currently just above 40% – to what it calls ‘proactive social investments.’

These are direct investments in socially beneficial issuers and projects, from domestic initiatives such as a commercial mortgage-backed security relating to the 10 Hudson Yards development in New York and debt issued by the Washington State Economic Development Finance Authority to pay for a waste-management facility to international ones such as the International Finance Corporation Forests bond, which supports the reduction of deforestation in East Kenya alongside investments in low-carbon growth.

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Germany

Serge Debrebant, Editor, Citywire Germany & Austria

Germany has embraced the ESG story like many other European markets, here are three notable funds either in terms of assets gathered or unique approaches to the question of sustainable investing which are available to German investors.

Ökoworld Ökovision Classic

AUM: €1.01bn (31/03/2020)

Ökoworld Lux claims to be the world’s first investment company to focus solely on sustainable investments. It was founded in 1995 as a subsidiary of the listed investment group Ökoworld, whose history stretches back to the 1970s. According to the company, Ökoworld’s founders Alfred Platow and Klaus Odenthal are pioneers of sustainable investing in Germany. The company’s first investment fund, Ökoworld Ökovision, was launched in 1996.

The fund invests globally in equities that meet its ESG criteria, which were developed by the company’s sustainability team, and an investment board of 12 monitors. Fund managers Alexander Mozer and Alexander Funk both currently have a Citywire + rating. At the beginning of the Covid-19 crash, the pair held up to 40% cash to weather the storm, which dropped to 20% by the end of March.

The fund is looking to invest in themes including renewable energy, environmentally friendly products, and humane working conditions. Its top three holdings are the digital healthcare group Teladoc, AMD, and Intel. In the year to the end of March, the fund has seen its performance fall 3%.

FairWorldFonds

AUM: €1.26bn (31/03/2020)

Cooperative banks and savings banks play an important and unique role in the German financial world, and both have their own asset management companies, in the form of Union Investment (for the cooperative banks) and DekaBank (for savings banks), which each in turn have portfolios that include ESG funds.

Union Investment’s FairWorldFonds, a defensive multi-asset fund, was launched in 2010 and focuses on sustainability and international aid, which is reflected in the decision to put up to 10% of its capital into microfinance funds. The rest is devoted to global equities and bonds, with exclusions for companies involved in human-rights violations, weapons production or violating worker rights. The ESG criteria were developed in cooperation with a Christian charity, a Christian bank, an ecological bank, and a German research institute.

EB-Öko-Aktienfonds

AUM: €99.6m (06/05/2020)

In 2018, the German Protestant church’s Evangelische Bank founded the asset management subsidiary, EB-SIM. ‘The bank had around 30 years of experience in sustainable fund management,’ said Andreas Fiedler, managing director of EB-SIM, in an interview with Citywire Deutschland in February. With the subsidiary, the bank wanted to reach new audiences for its sustainable funds.

It currently has eight funds on offer, including EB-Öko-Aktienfonds, a global equities fund founded in 1991, making it easily one of the oldest of its kind in Germany. It is managed by Citywire + rated Ralf Müller-Rehbehn, head of equity portfolio management. The sustainability principles were developed by the Evangelische Bank and are based on the UN Sustainable Development Goals. That said, its biggest holdings are familiar to most tech investors, with the top four slots occupied by Apple, Microsoft Corporation, AMD, and Nvidia.

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Asia

Audrey Raj, Editor, Citywire Asia

The top three ESG funds registered for sale in Hong Kong and/or Singapore posted $1.7bn in net inflows in the first quarter of 2020. Investors in Asia showed interest towards particular themes like infrastructure, environment, energy, water, and waste management.

3. BGF Sustainable Energy

AUM: $2bn

BlackRock’s $2bn sustainable energy fund takes third spot by netting $340m in investments in the first quarter. The fund, registered for sale in Singapore and Hong Kong, lost 18.87% over the same period.  Fund managers Alastair Bishop, and Charlie Lilford invest 70% of its assets in new energy companies. These companies are mostly engaged in alternative energy and energy technologies including renewable technology, renewable developers, alternative fuels, as well as infrastructure

Launched in 2002, this long-time fund has bigger exposure to the US, France and the UK. In Asia Pacific, the fund makes smaller pockets of investments in China, Japan, South Korea and Australia. It mostly invests in the utilities and technology sectors, followed by industrials and basic materials. Schneider Electric, NextEra Energy, Enel SpA, Vestas Wind Systems, and EDP Renovaveis are some of the companies among its top 10 holdings.

2. Fidelity Sustainable Water and Waste

AUM: $1.3bn

Fidelity International’s $1.3bn water and waste equity fund was the second most loved by investors. The fund, registered for sale in Singapore, attracted $487m in net new money. It returned -23.91% over the three months to March. Launched in 2018, the fund is managed by Bertrand Lecourt and Saurabh Sharma. While the fund invests globally, it is more focused on emerging markets.  The thematic strategy selects companies from the water and waste management sectors mostly in the US. It also seeks opportunities in China, the UK, France, Japan, and Australia.

The fund has a 61% exposure to the industrials sector, with utilities, consumer cyclical, and healthcare following closely behind. American Water Works, Waste Management, Aqua America, Woongjin Coway, Severn Trent, and Pentair are among its top 10 holdings. Fidelity has designed its own proprietary ESG rating tool, capable of determining how ‘green’ a business is.

1. Pictet Global Environmental Opportunities

AUM: $2.5bn

Pictet Asset Management’s $2.5bn environmental equity fund recorded the largest inflows in the first quarter. The fund, registered for sale in Singapore and Hong Kong, saw $893m in net new money. It returned -14.61% over the three months to March.

Launched in 2018, the fund is heavily focused on agriculture, forestry, clean energy and water. Fund managers, Gabriel Micheli, Yi Du, and Luciano Diana, may invest up to 30% of its net assets in China A-shares.

The fund is mostly invested in the US, followed by Europe. It also has pockets of investments in Japan and emerging Asia. Sector-wise, the fund has exposure to basic materials, consumer cyclical, financial service, energy, technology, and healthcare. Some of its top 10 holdings include Autodesk, Ansys, Thermo Fisher Scientific, Veolia Environment, Ecolab, Applied Materials, and Vestas Wind Systems.

In February, Pictet pledged to remove fossil fuel producers and extractors from its balance sheet this year. Its fossil fuel assets, including exposure to thermal coal and oil and gas extractors, amounted to CHF 250m ($256.7m) as of 31 December 2019.

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South Africa

Patrick Cairns, editor, Citywire South Africa

There are very few funds managed in South Africa that are explicitly ESG focused. The local stock market is too narrow for most managers to feel that a pure, local ESG strategy is viable, and few have attempted it on a global level.

However, many South African asset managers are signatories to the UN PRI, and place a high emphasis on ESG analysis. This includes most of the largest firms, as well as a number of small and mid-sized managers.

There are 53 South African-domiciled funds that currently carry a ‘high’ Morningstar Sustainability Rating. These cover local equity, global equity and both local and global asset allocation strategies.

Many South African managers also manage Ucits funds, although only two of those have a ‘high’ Morningstar Sustainability Rating. These are the 27Four Global Balanced fund of funds, and the Abax Global Equity fund. These strategies had mixed fortunes in the recent crash.

The Abax Global Equity fund out-performed its benchmark in March. It fell 11.1% during the month, while the MSCI All Country World Index (ACWI) was down 13.5%. The 27Four Global Balanced fund of funds, however, was down 11.5% for the month. While this out-performed pure equity indices, it under-performed its asset allocation benchmark of 60% global equities and 40% global bonds.

To the end of April, the Abax Global Equity fund fell 8.9% for the year. The 27Four Global Balanced fund of funds was down 10.7%, while the MSCI ACWI dropped 12.8%.

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Switzerland

Camilla Giannoni, Editor, Citywire Switzerland

Looking at the Swiss market there are several funds that stand out. The Fidelity European Dynamic Growth fund enjoyed net inflows of CHF 491m in March and has a total size of CHF 4.9bn. The fund, which is managed by Karoline Rosenberg and Citywire AAA-rated Fabio Riccelli, ranks third out of 293 for total return in the Equity - Europe category and has returned 20.5% over the past three years compared with 12.6% average loss in the sector.  

According to the fund’s factsheet, its top holdings include Sap Se, Novo Nordisk and British American Tobacco. Morningstar data indicates that the fund has a carbon risk score of 3.05, lower than the category average, which is 5.75. It also has a low fossil fuel involvement score at 0.18%, compared with 3.88% for the category average.

Another notable fund is the Pictet-Global Environmental Opportunities fund, managed by Yi Du, Gabriel Micheli and Citywire + rated Luciano Diana. It returned 9.8% over the past three years, compared with 1.4% for the sector average. In March the fund, which has a total size of CHF 2.4bn recorded net inflows of CHF 60.5m.  

According to its March factsheet, the fund allocates mostly to dematerialised economy, pollution control and energy efficiency. The assets are mostly allocated to the US at 56.87%, followed by France at 8.82% and Switzerland at 7.06%.  Data centre specialist Equinix, utility company American Water Works and Thermo Fisher Scientific are its top three holdings.

The Robeco Global Consumer Trends fund has returned 35.5% over the past three years, compared with 6.6% for the sector average. According to Morningstar, between November 2009 and the end of March 2020, the fund’s annualised return of 16.4% has outpaced the category average, which is 9.2%, as well as the MSCI ACWI Growth Index (12%).

Citywire AAA-rated managers Jack Neele and Richard Speetjens have managed the fund for the past 10 years. The fund, which has CHF 3.4bn in assets, recorded inflows of CHF 101m in March 2020. Its top holdings are MasterCard at 2.87%, Visa at 2.68% and Microsoft at 2.60%.

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Italy

Gianluca Baldini, Editor, Citywire Italy

During the coronavirus crisis in Italy most of the conventional funds underperformed its technical indicators, while ESG strategies outperformed, according to Lipper-Refinitiv analysis. Overall, 15,314 funds (44.6%) were able to outperform between January 31 and March 31, while 19,026 (55.4%) underperformed. Out of the 2,773 funds that use ESG criteria, 1,497 outperformed the benchmark.

The average performance of ESG funds in Italy in the period was 0.43% higher than the average of the conventional funds, which was a 0.65% decline. It should also be noted that the spread between the best and worst conventional funds ranged from -63.08% to +46.71%, which is much wider than the spread for ESG strategies, which was between -30.09% and +31.67%.

According to Morningstar, the best ESG funds available to Italian investors are the DWS Institutional ESG Euro Money Market fund, which managed by Holger Kindsgrab. This fund experienced net inflows of €1.47bn in March.

The BlackRock Ics Eur As Liq Envirally Awr Prem fund, which is managed by Bea Rodriguez and Matt Clay, had net inflows of €690.2m, while the Candriam Money Market Euro fund, managed by Pierre Boyer, €347.5m also did well.

Elsewhere, the Carmignac Court Terme fund registered net inflows of €324.5m, while the Aviva Monétaire ISR fund, which is managed by Sophie Labigne, added €251.1m in assets under management in March.

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UK

Ollie Smith, magazine editor, New Model Adviser

With the Covid-19 market having rocked all funds, our UK team has taken a closer look at three ESG funds that outperformed during this turbulent time.

Trium ESG Emissions Impact Fund

Q1 performance 2020: 15.34%

Trium’s ESG Emissions Impact fund stakes its reputation on delivering risk-adjusted returns by investing in companies with competitive emissions reduction strategies. Specifically, manager Joe Mares is looking for companies in the energy, utilities, materials, industrial, and transportation sectors offering better plans than their peers. This also includes oil and gas companies.

Trium recognises how cyclical and volatile those sectors can be, so to compensate it spends ‘a lot of time’ trying to find good shorts and index hedges to reduce the volatility of its long positions. Mares claims Trium is not trying to call the market, economy or commodity prices, or event use value, growth or momentum as factors.

You might not find a manager as opposed to speculating about the impact of Covid-19 as Mares is, and he remains tight-lipped about the companies the fund has or could short in future. That said, the manager is convinced that Western governments will use their coronavirus stimulus packages as leverage in forcing companies to act on their emissions, and says that the world will see a shift from ‘subsidies to mandates’ as a result.

LGT Sustainable BF Global

Q1 2020 performance: 9.35%

LGT said the fund has been particularly underweight BBB credit, and that it has been defensive for some time because credit spreads were so tight. Manager Darius Hinz saw clear signs that the global economy was nearing the latter end of a cycle, though he said ‘the timing and the trigger of the correction came faster than anticipated,’ in the form of Covid-19.

Throughout the first quarter of this year Hinz was underweight oil, which made a difference when prices crashed in March. As far as the future is concerned, Hinz said he will continue to run the fund with a defensive approach, though the widening of credit spreads does pose ‘interesting opportunities’ in solid issuers, something the fund has already started to make use of.

JPM Global Macro Sustainable I acc EUR

Q1 performance 2020: 6.72%

Also among the notable outperformers in the UK over Q1 is JP Morgan’s Global Macro Sustainable fund, which has around £562m in assets, It has driven its success with short-bias equity strategies, holdings in long cloud computing, software and pharmaceuticals, as well as its shorting of the South African rand.  The fund defines sustainable stocks as companies that ‘show effective governance and superior management of environmental and social issues’.

Managers Josh Berelowitz, Benoit Lanctot and Shrenick Shah said ‘key’ areas of their approach that have helped the fund over the past 12 months include its ‘focused implementation’. ‘For example, in equity, we hold around 40 names that are high quality with strong balance sheets that most reflect our long-term secular views.’

In the coming months, the managers said the sudden stop in global economic activity due to coronavirus will continue to severely impact employment, income and profit outcomes over the short- to medium- term, and all expect the market to increasingly focus on high frequency activity indicators as investors follow the strength and shape of the recovery carefully.

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UK – Retail

Gavin Lumsden, Editor in Chief, Funds Insider

What are socially responsible investment funds? No one in the UK knows for sure which is why the country’s fund management trade body, the Investment Association (IA), is half-way through a consultation to thrash out an agreed definition.

While investors wait for this earth-shattering development, funds that the IA thinks fit the bill are enjoying success in a difficult year. According to its figures, ESG-focused funds bucked the sell-off in March with £113m net inflows when billions were pulled out of bond and equity funds. 

That left responsible investment funds with a total of £25bn, or just 2.3% of total UK assets under management. Many expect that toehold to grow as the coronavirus pandemic highlights the dangers of poor environmental governance and social inequalities that increasing numbers of investors want to do something about.

One fund grabbing the attention of investors is Baillie Gifford Positive Change, a £274m concentrated, global equities fund launched in January 2017 to invest in companies its managers believe make a difference in social inclusion, education, the environment and healthcare.

Performance has been good with fund managers Julia Angeles, Kate Fox, Kirsty Gibson, Lee Qian and Will Sutcliffe gaining top Citywire AAA ratings for the best three-year total return to the end of March for a sterling fund in the Morningstar Global sector. 

That’s made investors sit up as it gives Baillie Gifford’s £9.9bn flagship Scottish Mortgage Trust (SMT), a popular global closed-end fund with a position in Tesla that the Positive Change fund shares, a run for its money. Between launch and 11 May, the fund generated a 124% return, beating the 119.5% of SMT and the 22.2% average of funds in the IA Global sector. 

Investment companies listed on the London Stock Exchange like SMT provide another way to access ESG expertise. Rival global trusts such as Alliance Trust (ATST), F&C (FCIT), Martin Currie Global Portfolio (MNP) and Mid Wind International (MYI) have all adopted responsible investing in one form or another.

Outside these, London-listed funds also offer rapidly burgeoning sub-sectors of social infrastructure, global utilities and wind and solar funds. These are primarily income funds, generating long-term, inflation-linked revenues from a mixture of government and private sector contracts. 

Shares in renewable energy funds in particular have been bid up by demand from ESG investors. Recently, however, they have struggled as investors have priced steep falls in long-term power price forecasts, and the slump in crude oil, on their asset valuations, which ironically these funds have done much to achieve. That ‘cannibalisation’ effect shows that the path to full ESG compliance may not always be smooth.