Market-Beating ‘Social’ Funds Bet on Technology, Clean Energy in 2017By
Ten of 15 sustainability-focused funds beat the Russell 3000
Clean energy dip after 2016 elections was a buying opportunity
Bets on environmentally and socially conscious companies last year paid off for several U.S.-based sustainable funds, which found that they could beat a robust bull market.
The Brown Advisory Sustainable Growth Fund, which focuses on finding large-cap growth companies with sustainable advantages in their businesses, took the top spot in Bloomberg’s second-annual ranking of ESG funds, after delivering a 28 percent return for 2017, outpacing the 19 percent advance for the S&P 500 Index.
"Sustainability sometimes leads us into areas and markets where we think other growth managers don’t tend to look," said David Powell, who co-manages the $458 million fund with Karina Funk.
ESG is still a relatively new strategy, with hundreds of funds started in the past three years. The rankings looked only at established funds with a five-year track record and at least $100 million in assets, equally weighting performance over one-, three- and five-year periods. Ten of the 15 funds on the list posted returns last year that beat the broad Russell 3000 Index’s 21 percent total return.
Clean Energy Pays Off
Fund managers focused on renewable energy said they were able to take advantage of a dip in clean-energy stocks following the U.S. presidential election, building positions in companies that performed well throughout the year. Renewable stocks delivered on earnings and dividends and the WilderHill New Energy Global Innovation Index returned almost 29 percent.
While a perceived lack of government support pushed down renewable stocks early in the year, "I was a little more confident given my conversations with utilities, which were ultimately the customers who were going to be buying wind power," said Kevin Walenta, portfolio manager of the Fidelity Select Environment & Alternative Energy Portfolio, which placed fourth in the Bloomberg ranking this year. "They were saying it was cost-competitive."
Technology stocks, which often disclose more sustainability data and have relatively light carbon footprints, also played a large role in propelling the performance of the funds. The most common top 10 holdings across the 15 best performing funds were Alphabet Inc., Microsoft Corp. and Danaher Corp. "Google and Facebook really stuck out among data-center companies in having extremely efficient data-center operations in terms of energy use," Brown Advisory’s Powell said about his bet on tech firms, which helped carry the fund last year.
Financial companies, which have also been favorites of ESG managers, played less of a role in driving momentum in 2017, but several of the ESG fund managers said Visa was a good bet, as the world’s biggest payments network surged 46%. Managers who focused more heavily on finding sustainable companies in Europe last year said that wager also paid off.
ESG fund managers said they’re cautious about volatility in 2018, while looking for opportunities to buy sustainable companies that can continue to grow, even though they may be temporarily undervalued.
"It’s clearly been a long bull market and we think we’re in the later innings of that, but we definitely feel this is the right time to own these sustainable businesses," said Joe Hudepohl, a portfolio manager at Atlanta Capital, who oversees the Calvert Equity Fund, which placed fifth in the ranking. "We think they’ll participate in a rising market, but if there is volatility on the horizon, they provide really good downside protection."
The Best Responsible Funds
Bloomberg ranks the top-performing U.S. funds in 2017 focused on ESG issues.
|Rank||Fund||Ticker||Manager(s)||Score*||Assets ($M)||1-year total return||3-year total return||5-year total return|
|1||Brown Advisory Sustainable Growth||BIAWX||Karina Funk, David Powell||86.4||458||27.9||15.1||16.6|
|2||Parnassus Endeavor||PARWX||Jerome Dodson||81.4||5,217||19.8||14.5||18.5|
|3||Calvert International Opportunities||CIOAX||Aidan Farrell||80.0||231||37.9||12.2||11.4|
|4||Fidelity Select Environment & Alternative Energy Portfolio||FSLEX||Kevin Walenta||76.2||196||25.3||13.0||14.7|
|5||Calvert Equity||CSIEX||Joseph Hudepohl, Lance Garrison, Jeffrey Miller, Robert Walton, Jr.||69.4||2,200||25.8||10.1||14.1|
|6||Pax Global Environmental Markets*||PGRNX||Bruce Jenkyn-Jones, Hubert Aarts||69.0||609||26.4||11.3||12.1|
|7||Green Century Equity||GCEQX||Brent Reeder||68.1||243||22.0||10.2||15.2|
|8||Portfolio 21 Global Equity||PORTX||James Madden, Anthony Tursich||65.8||501||27.9||10.6||10.5|
|9||TIAA-CREF Social Choice Equity||TICRX||Jim Campagna, Lei Liao||65.3||3,320||20.6||9.9||14.6|
|10||Pax ESG Beta Quality||PXWGX||Ran Leshem, Robert Tymoczko, Michael Branch, Annie Tan||64.9||213||21.9||9.8||13.9|
|11||Crossmark Steward Global Equity Income||SGIDX||John Wolf, Melville Cody||64.4||295||21.9||10.9||12.2|
|12||Neuberger Berman Socially Responsive||NBSRX||Ingrid Dyott, Sajjad Ladiwala||62.0||2,500||18.6||9.1||14.7|
|12||Parnassus||PARNX||Jerome Dodson, Ian Sexsmith, Robert Klaber||62.0||1,086||16.1||9.7||15.2|
|13||New Alternatives||NALFX||David Shoenwald, Murray Rosenblith||61.5||213.1||21.1||9.2||11.8|
|14||Calvert Small Cap Fund||CCVAX||Christopher Madden, Jade Huang, Michael McLean, J. Griffith Noble||60.7||319.0||13.2||10.3||15.2|
Methodology: Ranking includes open-end funds with ESG (Environmental, Social and Governance) as a general attribute in the fund prospectus, total assets of at least $100 million, and a five -year history. Takes into consideration one-year, three-year and five-year returns, weighted equally. Total returns and assets are as of December 31, 2017. Funds are either the primary or class A shares. Excludes ETFs.
*Effective June 30, 2016, the Pax Growth Fund was renamed Pax ESG Beta Quality Fund. Performance prior to that date is for predecessor fund.
— With assistance by Laurie Meisler