ESG Equity Funds in the Sell-Off

The first quarter of 2020 is the first time that many sustainable funds have been tested in a bear market. We look at how they held up compared to their peers 

Annalisa Esposito 14/04/2020 15:29:00
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The first quarter of 2020 has seen markets in turmoil, with the FTSE 100 and the S&P 500 suffering their greatest drawdowns in decades. For ESG investors this is a crucial period; it is the first time that many sustainable funds will have been tested in a bear market situation. The question on many investors' minds is: how resilient have these funds proved relative to their non-sustainable peers?

According to Morningstar Direct data, two-thirds of sustainable funds have performed better than their Morningstar Category Average, a measure which covers the performance of all funds, sustainable and non-sustainable.

We looked at 65 open-ended equity funds that are classified as sustainable in Morningstar Direct, which have a Morningstar Sustainability Rating and a Fossil Fuel Involvement Rating, as well as more than £150 million in assets under management.

How Have Sustainable Funds Performed? 

The below table shows the 10 best-performing sustainable funds in the first quarter of the year, when compared to the average return of their category. The five-star rated Trojan Ethical Income fund was down 15.7% in the first quarter, which may not seem much to write home about at first glance. However, when we compare this to the average performance of its peers in the Morningstar UK Equity Income category things look better: the fund outperformed the category average by 9.4 percentage points. 

Among the major contributors to fund's performance are Swiss healthcare company Roche, toothpaste maker Colgate-Palmolive and property business Assura, whose shares were up 10%, 3.6% and 8.4% over the period. Fund manager Hugo Ure uses a negative screening when deciding which companies to invest in, avoiding sectors such as fossil fuels, pornography and tobacco.

In particular, Roche (which usually focuses on cancer treatments) has been launching a clinical trial of a potential Covid-19 drug. Meanwhile, Colgate Palmolive is one of the go-to defensive stocks in most down market days, furthermore it saw a big surge in sales of sanitary and health care products (just think of hand sanitisers).  Assura, instead, has benefitted from holding in its portfolio plenty of care medical centres.

Fund Name Q1 2020 (%) vs Category Average (%) Morningstar Category
Trojan Ethical Income Fund -15.71 12.69 UK Equity Income
RobecoSAM Sust Healthy Living -10.95 8.08 Global Flex-Cap Equity
Morgan Stanley US Advantage -1.72 7.43 US Large-Cap Growth Equity
Pictet-Security  -11.75 7.28 Global Flex-Cap Equity
Stewart Investors Global EM Sustainable -13.06 6.68 Global Emerging Markets Equity
Hermes Impact Opportunities Equity -12.41 6.62 Global Flex-Cap Equity
Liontrust Sustainable Future UK Growth -23.24 6.01 UK Flex-Cap Equity
Pictet-Nutrition -13.50 4.97 Sector Equity Agriculture
Brown Advisory US Sust Gr USD C Acc -4.22 4.93 US Large-Cap Growth Equity
Kames Ethical Equity -24.33 4.92 UK Flex-Cap Equity

Source: Morningstar Direct Data. April 9, 2020.

The five-star rated RobecoSam Sustainable Healthy Living delivered the second greatest outperformance, up 8.1 percentage points compared to the average performance in its category, global flex-cap equity.

Pharma giants Gilead Sciences (GILD), Novo Nordisk (NVO) and Roche Holding have boosted performance, with their shares up 18.9%, 7.6% and 5.4 over the period. Gilead Sciences is an American drug maker that focuses primarily on developing antiviral drugs. The company is considering using remdesivir (a novel antiviral drug it has been working on for more than a decade) to treat Covid-19.

Novo Nordisk's main focus is to deliver drugs to people living with diabetes and other serious chronic diseases, but the company has now dedicated one of its labs to work on Covid-19.

Other interesting trends can be spotted looking at the best performing holdings of the funds in the top 10. For example, the five-star rated Pictet Nutrition - which beats its Morningstar category average, Equity Agriculture, by 5 percentage points - owns online pet food retailer Chewy, which may be benefiting as people forced to self-isolate buy pets in an attempt to feel less lonely.

Meanwhile, the five-star rated Pictet Security owns a Californian-based Equinix, which specialises in internet connection and data centres called Equinix. These assets are one part of the real estate sector which has performed well during the sell-off at a time when retail and office space is in the doldrums. 

The Bottom of the Pile

Of course, not all sustainable funds have outperformed their peers; the three-star rated Kempen Global Small-Cap was the worst performing sustainable fund in the first quarter of 2020, when compared to the return of its Morningstar Category Average. The fund was down 31.6% over the period, some 8.8 percentage points compared to the global small cap equity category.

Its main detractors are Spirit Airlines (SAVE), West Fraser Timber (WFT) and Bed Bath & Beyond (BBBY) – down 67.3%, 56.1% and 74.4% respectively. Low cost airline Spirit Airlines has been hit by lockdown, as flights and holidays are cancelled, while retail chain Bed Bath and Beyond has seen sales fall while shoppers are confined to their homes. West Fraser Timber, a Canadian forestry company, has been impacted by governmental restrictions on movement, travel, work and trade. 

LO Funds Generation Global, meanwhile, is down 7.1 percentage points compared to its global large-cap growth category. Its worst performing stocks were Indian bank IndusInd Bank (INDUSINDBK), American real estate firm Jones Lang LaSalle (JLL), and Dublin-based auto-producer Aptiv (APTV). 

Fund Name

Q1 2020 (%) vs Category Average (%) Morningstar Category
Kempen Global Small-Cap -31.62 -8.78 Global Small-Cap Equity
LO Funds Generation Global -17.97 -7.1 Global Large-Cap Growth Equity
MS INVF Global Property -27.34 -6.98 Property - Indirect Global
Kempen Sust Europe Smaller Cos -27.24 -4.13 Europe Small-Cap Equity
BNP Paribas Climate Impact Privilege -18.89 -3.54 Equity Ecology
L&G Ethical -28.99 -3.16 UK Large-Cap Equity
Dimensional Global Sust Core Equity  -18.56 -3.09 Global Large-Cap Blend Equity
Robeco QI Global Developed Sust Enhanced Index -17.77 -2.3 Global Large-Cap Blend Equity
AI Stewardship International Eq UK -12.97 -2.1 Global Large-Cap Growth Equity
MS INVF Emerging Markets Equity -21.76 -2.03 Global Emerging Markets Equity

Source: Morningstar Direct Data. April 9, 2020.



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Annalisa Esposito  is a data journalist for

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