Many large investment funds with environmental, social and governance criteria have outperformed the broader market during the COVID-19 pandemic, buoyed in part by the funds' heavy weighting in large technology company stocks that have seen their own strong performance.
S&P Global Market Intelligence analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management that select stocks for investment based in part on ESG criteria. The analysis found that 14 of those posted higher returns than the S&P 500 in 2020 through July 31, with those outperformers rising between 1.8% and 20.1%. In comparison, the S&P 500 was up 1.2% as of July 31. An analysis of the same group of 17 ESG funds in May 2020 found that all but two had lost value in the year to date.
Critics of ESG investing often question whether the strategy can deliver premium returns. But ESG fund managers have said their focus on nontraditional risks led to portfolios of companies that so far have been resilient during the COVID-19 downturn.
BlackRock, Inc. Chairman and CEO Larry Fink in a July 17 earnings call noted that demand for sustainable products continues to accelerate as clients increasingly turn to ESG, "not only for investments that reflect their values but also to enhance performance, risk management and portfolio construction."
Globally, flows into sustainable investment funds doubled to $54.6 billion in the second quarter of the year over the first quarter, according to Morningstar Inc. data.
The top performer in the latest ESG fund analysis by S&P Global Market Intelligence was the Brown Advisory Sustainable Growth Fund. The fund, managed by Brown Advisory Inc., gained 20.1% in the year to date. The second-highest performer in the group was Nuveen Winslow Large-Cap Growth ESG Fund with a price increase of 19.7%. That fund is co-managed by Nuveen Fund Advisors, LLC and Winslow Capital Management, LLC. The Putnam Sustainable Leaders Fund managed by Putnam Investment Management, LLC, came in third place with an increase of 10.8%.
The only two ESG funds in the group with negative returns in the year to date were Neuberger Berman Investment Advisers LLC's Neuberger Berman Sustainable Equity Fund, with a price down 0.4%, and Parnassus Investments' Parnassus Endeavor Fund, down 3.2% for the year, which was still better than those funds were performing in May.
Information technology stocks comprise at least 20% of the holdings for each of the funds reviewed, according to S&P Capital IQ data. As of July 31, technology stocks accounted for about 36% of the Brown Advisory Sustainable Growth Fund and about a 47% equity share of the Nuveen Winslow Large-Cap Growth ESG Fund. Tech stocks, in comparison, made up about 28% of the S&P 500 at that time.
As for technology stocks, for the six month period ended Aug. 11, the S&P 500 Information Technology Sector index value was up 10.8% while the S&P 500 overall was down 0.7%, S&P Capital IQ data shows. And some of the S&P 500's biggest technology company stocks by market cap — Facebook Inc., Amazon.com Inc., Apple Inc., Microsoft Corporation and Google parent Alphabet Inc. — as of July 24 had markedly outperformed the rest of the index for the year. The FAAMG stocks were up 29.2%, compared to less than 0.3% for the rest of the S&P 500.
Sarah Hindlian-Bowler, a senior software analyst at financial services company Macquarie Group Ltd., said the performance of information technology stocks reflects the value those industries are providing to society during the COVID-19 pandemic.
"There has definitely been a dollar rotation into technology in this current environment," Hindlian-Bowler said. "[I]f you look at the world as a whole right now, there really aren't a lot of great alternative places where there's a clear thematic and real benefit from the actual virus, which is the work-from-home, school-from-home component."