Many market observers have argued that environmental, social, and governance fund strategies outperformed the broader markets due to the support from growth-heavy technology names that rallied over the past year, but strength in the value style could also further support the ESG segment.
According to the Bank of America, ESG funds have more exposure to cyclical sectors than the broader industry, Bloomberg reports. Specifically, ESG funds are overweight industrial, raw-material, and real-estate shares.
“One of the key pushbacks we often get from investors is that ESG benchmarks have outperformed because they are overweight tech and growth stocks,” Marisa Sullivan, head of U.S. ESG research for Bank of America Global Research, told Bloomberg. “We found they are overweight a lot of cyclical sectors, so maybe they aren’t as poorly positioned for a value rotation.”
Bank of America pointed out that ESG funds avoided the growth-oriented consumer services sector and have increased exposures to energy and utilities in recent months, but that they are still underweight those industries compared to the broader markets.
“There’s a little bit of a misconception that everything ESG-oriented has to be growth or tech heavy,” Omar Aguilar, chief investment officer of passive equity and multi-asset strategies for Charles Schwab Investment Management, told Bloomberg. “The evolution of these ESG strategies is still in flux, and the makeup of these ESG strategies will be a key part of how they evolve this year.”
Nevertheless, some ESG funds do include hefty tilts toward mega-cap technology names like Apple, Amazon, Google’s Alphabet, and Facebook. Consequently, they have took a hit when the tech segment recently pulled back.
“Those ESG funds that are heavily allocated to those growth-oriented stocks where their value is dependent on the value of their future cash flow, they’ll be super sensitive to what happens with longer-term interest rates,” Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, told Bloomberg.
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