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ESG withstands first big test of a new era; A familiar laggard in a record month for active funds

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Stress test

November’s vaccine-inspired market euphoria was a welcome tonic for most portfolios. For those focused on sustainable strategies, it was the first test of whether the latest surge in interest could withstand a variety of market conditions.

On the flows front, there wasn’t much sign that buyers had their heads turned by soaring share prices in less ESG-friendly sectors. Data from SocGen shows November was another record month for ESG ETFs across the US, Europe and elsewhere, as funds took in a collective $12bn.

That equated to 11 per cent of all equity ETF flows: well down on the 23 per cent year-to-date average, but still higher than the 10 per cent share of market the strategies accounted for last year.

Events also panned out pretty well from a performance perspective. Even the biggest ESG advocates wouldn’t claim that such funds can outperform all the time – and particularly not when the timeframe in question is as short as a month. But many of the most popular strategies among UK fund buyers made a good fist of things nonetheless.

In the UK, for instance – where the average fund roared away with a return of just over 14 per cent last month – most ESG favourites nonetheless managed to post a double digit return. In areas like UK equity income, European and EM equities, the most popular sustainable offerings largely matched the average return in the sector. Among corporate bond funds (a grouping less susceptible to the effects of market rotation) most offerings outperformed on the month.

The next test for these funds will be whether they can withstand a longer period of value stocks returning to favour, should that long-anticipated event come to pass. For now, the initial signs are promising.

Anticlimax

More signs that some trends are hard to shift nowadays: those 14 per cent plus November returns for UK equity funds failed to spark much in the way of buyer interest, according to Calastone fund flow data.

While last month saw equity funds as a whole post their second highest flows on record – and the best month in more than five years for active equity funds – the UK remained at the bottom of the pile. UK growth and UK income strategies were the only major equity groupings to see net outflows on the month, of £222m and £465m respectively.

That’s not to say there was no buying going on domestically. Total buy and sell orders for all equity funds hit £24bn, a figure second only to the record achieved at the height of the Covid crisis in March. That’s likely due to a switch from growth to value among buyers.

But most would’ve assumed this shift would have been accompanied by greater interest in the value-friendly UK market as a whole. And investors were generally pretty happy to embrace risk elsewhere: the three riskiest categories of funds saw sizeable inflows, while redemptions from lowest-risk categories stood at their highest ever level, Calastone said.

The beneficiaries, on the actively managed front, were as you’d expect: global funds, sector-specific offerings, and emerging market strategies. Active US funds also saw healthy interest, the need for a more tailored approach perhaps working in their favour. But it remains to be seen whether UK funds are still awaiting an unleashing of pent up demand, or whether interest is simply structurally lower than it once was.

Big buys

Standard Life Aberdeen’s move to take a sizeable stake in Tritax Management gives it an interest in a listed vehicle that’s among the most popular closed-ended options in wealth portfolios. And this isn’t the first time that trusts have attracted the attention of deep-pocketed buyers this year.

In fact, it's not even the first time this month: today’s Big Box move follows swiftly on from Japanese firm Orix’s acquisition of a 70 per cent stake in infrastructure fund provider Gravis last week. And as Numis notes, there is one other example: earlier this year Gresham House bought the manager of the Residential Secure Income fund.

All of these deals are predicated on management teams remaining at arms length, so the impact on holders is likely to be pretty minimal. But the common thread to all these deals is alternative income: providers, as well as fund selectors, are showing an increasing appetite for such plays.

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