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The Best Performing ESG Funds - and the Worst

ESG has become a trendy way to invest in recent years, but which funds are the ones worth backing, and which have been lagging?

Annalisa Esposito 5 August, 2019 | 10:33AM

Wind farms

Ethical investing has become very trendy in recent years, being the perfect combination for investors to put morals and profits on the same page.

More and more funds are adopting ESG criteria, where ESG stands for environmental, social and corporate governance - the three central factors in measuring the sustainability and ethical impact of a company’s investments.

Historically, sustainable investing has struggled to attract investors because ESG factors were considered a limit to returns. However, a number of funds have now proven this is not necessarily the case. Indeed, according to latest figures from trade body the Investment Association, investors poured £234 million into ethical funds in June alone. However, the sector still only accounts for 1.5% of total assets under management. 

Yet, while the past 12 months have seen some extreme bouts of volatility - most notably the last quarter of 2018 – many ESG funds have performed well.

Over the past year, for example, the four-star rated Axa Global Factors Sustainable Equity fund has delivered almost a 17% return - which represents a solid 10% more than the average return produced by funds in its Morningstar category of Global Large-Cap Blend Equity. The fund invests in companies in developed markets all over the world, with top holdings including Coca-Cola Company and Crest toothpaste-maker Procter & Gamble.

Morningstar Direct data shows that the Axa fund is not alone in putting in a strong performance over the past year; three Liontrust funds appear on the list of the best-performing ESG-focused funds.

Best-performing ethical funds

“We currently invest in three transformative trends - better resource efficiency, improved health and greater safety and resilience - and 20 themes within these trends such as technological and medical advancements,” says Peter Michaelis, head of sustainable investment at Liontrust Sustainable.

The Liontrust funds invest in emerging trends such as the growth in electric vehicles and healthy food, innovations in efficient air conditioning, insulation, industrial automation, efficient buildings and smart farming. Liontrust has a strong suite of sustainable funds, but is about to broaden out its capabilities with the acquisition of Neptune

Also among the top performers is the Hermes Impact Opportunities Equity fund, which returned more than 16%. Tim Crockford, lead manager on the fund, says the fund considers the United Nations’ Sustainable Development Goals when making its investments. “These long-term opportunities transcend the cycle, thereby reducing cyclical volatility,” he says. The fund has 36% of its assets in US firms, with other investments across Europe and Australasia. Top holdings include Bank Rakyat Indonesia and US engineering software firm Ansys.

The Bronze-rated Royal London Sustainable World Trust is also in the top performers’ list, up almost 14% over the past 12 months. Morningstar Analyst Rajesh Yadav says the fund is a solid choice for investors looking for higher capital growth. The fund invests in the likes of payments firm Visa, sportswear brand Adidas, and pharma giant Roche. Manager of the fund, Mike Fox, says Microsoft has been among the strongest performers in the fund.

But not all ESG funds have had such a good year. The Premier Ethical fund, for instance, is down 6% over the past 12 months – despite a strong rally in the first part of 2019 – the weakest performer of the group.

Worst-performing ESG funds

Also among the weakest performers over the past year are the Bronze-rated Kames Ethical Equity and Kames Ethical Cautious Managed funds. The funds employ negative screening, ruling out sectors such as pharmaceuticals, tobacco and defence as well as number of resource firms and banks. As a result, the fund’s tend to have a higher exposure to small and mid-cap stocks, which have performed poorly in recent months as uncertainty over Brexit has sparked concerns about the outlook for domestically-focused firms.

Kames Capital says: “The Ethical Equity Fund performance over the past year has benefitted from exposure to some of the more internationally diverse plays including Aveva, Relx, Coca Cola HBC and GB Group. Headwinds have come from some of the more cyclicals holdings (e.g. Robert Walters, DS Smith) and selective domestics.”

The Silver-rated Stewart Investors Indian Subcontinent Sustainable fund, which invests exclusively in the Indian emerging equity market, is also among the worst performers.

While the region enjoyed a rally in May after the Indian election, the fund has managed to return just 0.9% over the past year. Still, Morningstar analyst Jan Nel reassures that the fund has done extremely well since manager Sashi Reddy joined in July 2009 and that overall “remains a strong option in this space and is likely to beat its benchmark and category on a risk-adjusted basis over a full market cycle."

Ben Yearsley, director at Shore Financial Planning, says: "Every fund you consider for investment should be compared to other funds doing a similar thing to determine how well the manager and his strategy has done. ESG funds are no different - there are good ones and bad ones, and investors need to do their homework." 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

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