Sustainable funds in Australia and New Zealand received inflows of $1.12 billion in the March quarter, down 68.6 per cent from a record-breaking $3.58 billion recorded in the previous quarter, a new report from Morningstar has indicated.
Morningstar ESG analyst, manager research, Erica Hall explained that market conditions have been difficult for sustainable investors.
“Many sustainable strategies tend to underweight or not hold the energy sector, which has performed well, and they have been negatively impacted by exposure to technology stocks, which have undergone recent downward pricing pressure after a sustained period of strong performance growth,” she noted.
“Despite these short-term market challenges, sustainable assets globally have been more resilient when compared with the broader market.”
Inflows for sustainable funds globally fell 35.7 per cent against a decline of 73 per cent for the overall fund universe. This was also reflected locally, albeit to a lesser extent, with inflows for the broader universe down 86.2 per cent.
Morningstar said that a total of $37.99 billion was invested in Australasian-domiciled sustainable funds at the end of the March quarter, down 8.59 per cent on the December quarter of last year.
However, total assets were up 41 per cent in comparison to the first quarter of last year and have also more than doubled over the past two years.
Flows during the quarter were dominated by six fund houses, with Dimensional accounting for $333.7 million ahead of Vanguard ($263.0 million), Australian Ethical ($216.5 million), BetaShares ($170.0 million), Alphinity ($118.0 million) and Nanuk ($97.0 million).
Ms Hall said that sustainable funds had faced an “extremely challenging” quarter during which only 26 per cent had outperformed their peers within their respective categories.
She noted that the S&P/ASX 200 Energy Index had climbed 31.8 per cent over the first four months of the year and the S&P/ASX 200 Resources Index had risen 15.4 per cent.
Meanwhile, sectors which ESG strategies have traditionally favoured “performed particularly poorly” according to Ms Hall, including a 22.7 per cent drop for the S&P/ASX 200 Information Technology Index and an 8.0 per cent decline for the S&P/ASX 200 Healthcare Index.
“Sustainable investors should expect short-term fluctuations compared with the broader market as portfolios will tend to have certain structural biases in order to meet their sustainable objectives,” she said.
“The long-term outcome is what matters, and the five-year data demonstrate that sustainable funds are delivering in line with peers.”
Morningstar found that 52 per cent of sustainable investments with a track record of five years had outperformed their category peers over that time period.
“This is encouraging for investors looking to build ESG portfolios that align with their values, knowing that they won't have to sacrifice returns compared with mainstream funds to invest sustainably,” Ms Hall said.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
