Lukas Strobl: I'm here with Morningstar fund analyst Ronald Van Genderen to talk about actively managed sustainable equity funds in Europe. Now, like in most fund classes, these funds have seen weaker inflows than their passive equivalents, but there may still be opportunities.
First off, Ronald, how has this asset class been doing and what is the outlook in the near term for sustainable equity?
Ronald Van Genderen: Yeah. So, in terms of flows, we have seen a slowing of inflows last year. And while flows seem to have picked up in Q4 of last year, in Q1 of this year, we again saw a slight decrease in inflows. So, they had a tough year, but that's quite explainable given the backdrop of geopolitical risks, higher inflation, rising interest rates. But again, for the near term, we think that the investor interest in sustainable equity flows will remain strong going forward.
Strobl: Alright, what are your top picks in this space?
Van Genderen: Well, my first pick will be Schroder's Global Sustainable Growth. It's managed by two managers. And while we have seen a departure of a co-manager in 2022, she has been adequately replaced and the highly regarded Charles Somers remained at the helm. What we like is that they can leverage 100-plus global analysts of the firm. And in the process, we like the focus on quality growth, but they have also the leeway to invest in more opportunistic plays that can be more cyclical in nature. And together with a strong valuation discipline, this causes the portfolio to be less growthy than peers in the in the Morningstar category, Global Large Cap Growth Equity.
Strobl: Is that flexibility to diversify away from growth a common differentiator in successful funds?
Van Genderen: Well, it's not common, I would say. Many of the peers to have a strong growth bias. And it can be nice for investors to have an opportunity in this space that is less growthy.
Strobl: Alright, what's your next pick?
Van Genderen: Yeah. The second pick would be Wellington Global Stewards. It's also managed by two managers. While they didn't have an extensive background as portfolio managers – actually, this was their first stint as a portfolio manager starting in 2019 – they do have a strong background as an analyst at the firm. And they also have a strong bench of analysts that they can leverage. Wellington has 56 global industry analysts. So, that provides a strong resource for them. Their approach is less proven. It only started in 2019. But they are off to a good start, and they focus on stocks that combine a relatively high return on capital together with good stewardship.
Strobl: That's two funds with a pretty deep bench of analysts. Is bigger always better?
Van Genderen: It's not always the case that big is better, but it's the way that the analysts, the deep bench is leveraged on how effective and efficient is that being done.
Strobl: Got it. All right. What's number three?
Van Genderen: Yeah. The last one is JPM, JPMorgan Emerging Markets Sustainable Growth. Again, two managers, one lead manager and a backup manager. And also, this fund can leverage a deep bench of analysts and portfolio managers. Here we see 100 in total. They are part of JPMorgan's EMAP team or Emerging Markets and Asia Pacific team. This fund is also quite young. It also started in 2019, but it's a version, the sustainable version, of its sister core strategy that we have in high regard as well. It focuses on quality growth, and therefore, the portfolio also has a growth bend.
Strobl: Well, sounds like people and process are a key for all three. And obviously, that is what you have us here at Morningstar to shine a light on. Thanks for these picks, Ronald.
For Morningstar, I'm Lukas Strobl.
