2020 has been a challenging year for investors, because of Covid-19 outbreak. But according to Morningstar research, sustainable funds outperformed the traditional ones during March sell-off and that has thrown a spotlight on this part of the investment world.
The result can be explained by a combination of factors, including the fact that companies which score highly on ESG tend to have more conservative balance sheets and competitive advantages, and these are attributes that make companies more resilient during market downturns.
Moreover, they tend to be well-run businesses that treat stakeholders fairly, address environmental challenges, and have fewer controversies. Consequently, they are better equipped to weather periods of uncertainty.
This year, investors interested in sustainable funds can find under the Christmas tree more choices than in the past. Product development remained high in 2020 and the European sustainable funds universe reached a record high of 2,898 products (as of October 2020).
Hortense Bioy, director of sustainability research for Morningstar EMEA says: “This high level of product development is unprecedented, spurred by the European regulator, which aims to divert even more money into sustainable products to meet Europe's Paris Accord targets. With its Sustainable Finance Action Plan, the European Commission aims to reorient capital towards sustainable activities and align to the EU goal of being net zero carbon emission by 2050”.
2 Top Intentional Funds
The Pictet Global Environmental Opportunities and Stewart Investors Global Emerging Markets, both have a Bronze Morningstar Analyst Rating, 5 globes and a Low Carbon Designation.
Morningstar analyst Ronald van Genderen says the Pictet fund is a solid choice in the ecology space as it boasts an experienced team that benefits from additional resources. The strategy uses a bottom-up approach, the same that is applied at all Pictet thematic equity offerings and its process starts by defining the investable universe based on selecting companies with a small environmental footprint. This is followed by an analysis on purity, trading liquidity, and share-price volatility. The most interesting stocks receive a company score, which includes fundamental business franchise analysis, management quality, and equity attractiveness (valuation and momentum).
As for the Stewart Investors fund, Andrew Daniels, senior analyst at Morningstar, says: “The fund benefits from an impressive investment team and a best-in-class investment approach." The team focuses on finding management teams with a shared vision of driving sustainable development in the markets in which they operate.
A byproduct of this philosophy is that the strategy will not invest in companies with material exposure to harmful products, including weapons, tobacco, alcohol, fossil fuels, and gambling. That vision also extends to less obvious areas, including certain soft drink and snack manufacturers, with the rationale being the negative health effects of their product portfolios on the general population.
2 Non-Intentional ESG Funds
Combining the highest Sustainability Rating and the Low Carbon Designation, we came across other low ESG risk funds that are not intentional ones; MFS Meridian Funds Global Concentrated fund has a Silver Morningstar Analyst Rating, for example.
Morningstar analyst Andrew Miles says: “We have long been fans of MFS’ approach. The well-worn process is disciplined and repeatable. Rigorous fundamental research uncovers companies that the group believes can grow earnings and cash flows in a sustainable fashion. At 20-30 stocks, there are amplified risks, notably in the consumer and healthcare sectors, but discerning judgment and patience to avoid overreacting to superficial events has avoided costly mistakes”.
Elsewhere, the five globe-rated BGF European Fund is considered a “promising offering” for investors looking in an European equity large-cap growth fund. Stefan Gries took the helm of the Bronze-Rated fund in June 2019 and while Van Genderen says he is still short on manager experience, he adds: "We have a favorable impression of Gries, as he comes across as a talented manager”.
BlackRock earned a Basic Morningstar ESG Commitment Level in November. The world’s largest money manager in January 2020 declared its desire to augment and extend its existing ESG efforts throughout its organisation. Its vow could prove to be a turning point for the industry and a sign that investment firms can no longer ignore ESG risks. But, according to Morningstar research team, “it was also an effort to catch up to global rivals that have more thoroughly inculcated ESG standards in their investment processes, operations, and cultures. Only time will tell if its ambitious integration efforts permeate the sprawling firm”.
A 5-Globe Chinese Equity Fund
The Chinese equity market has been one of the top performers in 2020 thanks to a strong recovery after Covid-19 outbreak. The 5-Globe UBS (Lux) Equity Fund China Opportunity fund is worth a look for ESG investors trying to tap into the region. a strategy to look at.
Rated Gold, the fund's manager Bin Shi brings 26 years of investment experience and has led this strategy since it was restructured in July 2010. Claire Liang, Morningstar senior analyst says: “We think he is one of the strongest China equity managers, having demonstrated the ability to identify winners in their early stages and pulling off astute tactical cash calls during market extremes”. UBS Asset Management has deployed ample resources to boost its ESG capabilities in recent years, but there is still some way to go. The firm warrants a Morningstar ESG Commitment Level of Basic.
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