Dispersion among french sustainable funds do not place investors on an equal footing

Over the first quarter of 2020, the SRI Labeled sustainable funds outperformed traditional indices. But this conclusion hides a strong dispersion which should alert the saver not buy unquestioningly.

Sustainable funds outperformed the market during the Covid-19 crisis. We analyze the performance of Europe Equity funds, a much appreciated category to french investors.

We selected the 55 SRI labeled Europe Equity funds. The french SRI Label has been launched in 2016 by the french government to promote sustainable funds after a certification to prove their ability to integrate Environmental, Social and Governance (ESG) criteria into the management process. We compared them to the MSCI Europe index. The Euro Stoxx 50 index with its 50 companies is too narrow to serve as a comparison. This remark seems naive, but an individual cannot do this job : the MSCI index is aimed at professionals who pay fees to MSCI.

We used the Quantalys tool which allowed us to identify the heterogeneity of the classification presented on the SRI Label website. These 55 SRI labeled European Equity funds are not all similar. One fund even manages to post a positive performance (+ 0.55%). But its volatility does not lie : 8% against 48% for the MSCI Europe. In fact, it is an hedged equity fund.

First observation, the average performance of SRI labeled funds is better than the index : -21.6% against -22.6%. 30 funds (54.5%) posted positive outperformance, 25 underperformed. Outperformances range from +0.5% to +9.6%. The underperformances range from -0.4% to -7.0%. We have no information to know whether these percentages apply to similar managed assets. Transparency on managed assets is the black hole of information on investment funds.

Second observation, the dispersion is strong between the best and the worst sustainable funds : from -13% to -29% compared to -22.6% for the MSCI index. It should be noted that the 4 SRI labeled ETFs have an average performance of -19.8%. The performance of the 50 SRI labeled FCP or SICAV (excluding the hedged fund) was -22.2%, very close to the MSCI index. The ETF is already proving to be a tough competitor.

This good result can have several explanations. A first one, rarely known, lies in the weight of cash retained by portfolio managers. When the stock market drops by 20%, 10% in cash gives a 2% advantage. The index is always 100% invested but managers rarely, particularly in downturns. This will also explain a smaller increase in the upturns. A second explanation lies in the manager's ability to identify good "sustainable" companies. Unfortunately, there is no study to identify the contribution of each of these two factors.

This year, inflows are strong in listed ETF. It is positive (€6.5 bn) despite the fall in stocks prices, which shows the huge interest of clients. Again, there are no easily access to studies that indicate whether individuals or institutions are behind these inflows. Finally, I did not find any article which specifies the inflows or outflows on FCP or SICAV. The concentration of flows on ETFs could show the push of passive (ETFs) vs active investing (FCP, SICAV). This phenomenon is already widely observed in the United States.

All categories combined, the outstanding amount of all SRI labeled funds (including very few ETFs) is €150 bn (source The SRI Label but no mention of the managed assets by category). The managed assets of all SRI or ESG ETFs is € 23 bn (source Investir).

This trend of outperformance is not observed over 3 years. Over this period, only 34.5% of the 55 sustainable funds outperformed the index.

Talking about performance of sustainable funds is not so simple. Individuals need to knew a few good websites to identify the most comparable funds in a same category.

Conclusion

SRI labeled funds have done better than the index in the first quarter but a large dispersion is observed between the best and the worst performing funds. SRI ETFs prove to be tough competitors. As there is 7 times more assets in SRI labeled funds than in SRI ETFs, investors have more chance to underperform the market choosing FCP rather than ETF. This trend in outperformance is not as largely observed over the last 3 years. The first quarter unveils an unexpected pattern combining huge inflows during a major downturn. Picking the right sustainable funds remains not so simple.