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Retail investors tilt to ESG in emerging markets
The gap between fund flows for ESG-focused funds and their regular equity, multi-asset and bond counterparts in emerging markets widened further in the past six months, according to figures from Informa Financial Intelligence, a global data provider.
Informa’s EPFR (Emerging Portfolio Fund Research) database for emerging markets (EM) flows, shows that while the fund flows for all equity and multi-asset funds, used primarily by international retail and wholesale investors, declined between 2018 and 2020 inclusive, and bond funds showed a modest positive total flow, funds which had SRI/ESG strategies in those three product segments had big increases in inflows, accelerating in the second half of 2020.
The share of total assets managed by all EM equity funds held by SRI/ESG funds jumped from 2.4 per cent to 4 per cent in the past 12 months.
In a short technical paper, ‘SRI/ESG: recent trends for emerging markets funds’, Cameron Brandt, EPFR director of research for the Cambridge, Massachusetts, financial information company, says that while the reasons for the trend vary widely, the defensive qualities of the funds appear to be an attraction and are appealing to asset-rich baby boomers.
Brandt, together with Vik Srimurthy, a quant consultant, write that the recent trend seems to be at odds with the stereotype that ESG tilts are driven by millennials and other younger investors. They note, however, that the weight of money still resides with baby boomers, who have about 60 per cent of all money in the retail funds.
While there is also a strong trend to SRI/ESG funds in the bonds category, the unconstrained bond funds, in aggregate, remain ahead of their specialist counterparts in terms of performance.
With equity and multi-asset funds, those with SRI/ESG strategies showed better returns before fees in the three-year period. However, SRI/ESG bond funds lagged the unconstrained bond funds for returns.
For the year to November 2020, assets under management for EPFR-tracked SRI/ESG equity funds nearly doubled, and for bond funds more than doubled.
The authors say: “The goals embedded in ESG strategies are often at odds with political imperatives of EM governments. There are signs that, in the case of Russia investors are questioning whether SRI/ESG funds can really move the needle.” SRI/ESG funds targeting Russia were the only ones which showed declining flows last year.
An expected reset of China-US trade relations under a Biden administration plus significant outperformance by China funds prompted a further shift towards China.
Growth-orientated SRI/ESG EM funds, with big exposures to technology, telecoms and healthcare are getting a bigger share of the flows, the report says.
“The question of whether investing for good requires taking a hit on performance has dogged SRI/ESG funds for years. However, over the past six years SRI/ESG emerging markets equity funds tracked by EPFR have collectively outperformed the overall group by an average of 3.9 per cent a year,” the authors say.
“That number needs some qualification: since they need to apply screens to their portfolios on a regular basis, SRI/ESG funds tend to be actively managed – though that is changing — and to have higher running costs than their unconstrained peers.”
