Active funds pivot to ESG in bid to fight off passive trackers
ESG funds are going some way in helping active fund managers stave off the threat of the increasingly popular passive trackers.
Inflows into active ESG funds reached a record £392m in September taking the quarterly total to £1bn, according to data from funds network Calastone.
The continued emphasis on ESG-led investment strategies contrasts with the waning attractiveness of every other asset class, other than equity funds.
Traditional active funds have suffered £5.7bn of outflows in the year-to-date while its ESG counterparts have boasted inflows of £2.4bn.
Between 2016 and 2018, traditional funds saw £11.3bn of inflows but by the end of last month the money had flowed out again. Traditional active equity funds therefore have had no net inflows for four years.
Instead, active ESG funds have taken their place having accounted for all the cumulative new money flowing in since the end of 2018. And previous research shows UK investors have opted for these funds more than any other over the past three years.
ESG goes mainstream
This appetite for a more ethical approach to investment appeared to coincide with the release of David Attenboroguh’s Blue Planet 2 documentary in the autumn of 2017. Certainly the investment management industry has not ignored the rising demand among investors.
Earlier this year, Blackrock boss Larry Fink indicated just how mainstream ESG principles had become when he declared: “We are on the edge of a fundamental reshaping of finance.”
And the onset of the pandemic has only accelerated the inevitable shift to ESG-focused funds. As investors assess the resilience of companies in a post-pandemic world, sustainability and governance will become key indicators.
“Recent events with Covid-19 have shown how our lives are changing and how technology is playing an ever increasing role in our everyday lives and that sits comfortably with the focus from many ESG funds that have looked to ‘new’ industries rather than the old industrial structure of our economy and stock market”, said Ryan Hughes, fund manager at AJ Bell.
Active funds fend off passive trackers with sustainable investment
The pivot to ESG funds not only captures the mood of investors and society more generally, but it s a savvy business move.
“By pivoting to ESG funds, they are not only capturing the Zeitgeist, but also bolstering their margins”, said Calastone’s head of markets, Edward Glyn.
Fund flows have turned decisively away from active funds and into passive funds. Passive funds have enjoyed inflows of £21.4bn since the autumn of 2016, but they are unable to But passive trackers, while do not have ESG screens and allocate money to stocks passively.
“There is enormous public interest as ESG goes mainstream, and active managers are able to differentiate these products much more effectively from passive funds, and they can charge premium fees as a result”, Glyn added. But as ESG cements its role as a popular fund category, it is likely that passive fund houses are launch ESG funds in the next few years.
“We are already seeing growing trade volumes for passive ESG equity funds on our network, though they are much smaller than their active counterparts”, Glyn said.