As investors rotated out of growth and into value, socially responsible funds that track environmental, social, and governance principles took an indirect hit.
ESG strategies target themes beyond company fundamentals and have leaned heavily toward growth-oriented companies in recent years, notably through technology giants like Apple, Google’s parent company Alphabet, and Microsoft. This growth tilt helped 94 U.S. ESG-related exchange traded funds rise over 20% on average last year, beating the bellwether S&P 500’s gain of more than 16%, the Wall Street Journal reports.
However, the recent pullback in growth stocks has also affected ESG funds in recent weeks. As of February, Morningstar Direct data revealed net assets in growth-oriented U.S. ESG funds was $30.3 billion, compared to around $7.5 billion in value-oriented funds. From December to February, investors looked to value ESG funds over the growth-oriented counterparts, with value funds bringing in 50% more money in February compared to their growth-oriented rivals, according to Hortense Bioy, global director of sustainability research at Morningstar Inc.
“These numbers mirror the value style rotation that we’ve seen recently elsewhere in the market,” Bioy told the WSJ.
Gautam Dhingra, chief executive of Chicago-based High Pointe Capital Management LLC, argued that ESG funds “have benefited from prior exposure to technology stocks.”
Jordan Waldrep, co-founder TrueMark Investments LLC, also pointed out that new ESG offerings have not let up their tech favoritism. For instance, the S&P 500 also includes a heavy 26% tilt toward tech.
“Funds are launched into the economy that they are dealing with,” Waldrep told the WSJ.
Nevertheless, money managers and fund providers can still customize their ESG fund strategies. Jordan Farris, head of ETFs at Nuveen, said his company took a different approach by creating value- and growth-oriented options for ESG fund investors.
“When you’re starting off and getting into developing ESG products, the growth space is a natural area to go to,” Farris told the WSJ, adding that the company’s value-oriented ESG ETF brought in over $115 million in inflows as of the end of March and is one of the largest value ESG funds available.
“One of the reasons it is large is because there aren’t that many [value-strategy] options,” he added. “I think more products will come to market this year.”
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