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Chart of the Week – October 16, 2023

Average 12-month performance of actively managed sustainable and conventional funds-Taxable bond funds and US equity funds across mutual funds and ETFs Notes of Explanation: Sustainable funds based on Morningstar’s classification.  Data as of September 30, 2023, and performance results represent the arithmetic average.  Sources: Sustainable Research and Analysis, Yahoo Finance and Morningstar Direct.

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The Bottom Line: Methodologies used to analyze the outperformance or underperformance of sustainable and conventional mutual funds and ETFs may produce distortions and skew outcomes.  

Average 12-month performance of actively managed sustainable and conventional funds-Taxable bond funds and US equity funds across mutual funds and ETFs Notes of Explanation: Sustainable funds based on Morningstar’s classification.  Data as of September 30, 2023, and performance results represent the arithmetic average.  Sources: Sustainable Research and Analysis, Yahoo Finance and Morningstar Direct.

Observations:

  • Sustainable funds outperformed their conventional counterparts over the twelve-month period ended September 30, 2023 across just one out of four broad categories consisting of actively managed mutual funds as well as ETFs. The two broad categories that are examined here are restricted to taxable bond funds as well as US equity funds, further dimensioned into ETFs and mutual funds.  In these instances, the average performance of actively managed sustainable US equity ETFs exceeded the average total return results achieved by their conventional counterparts by 3 percent.  Otherwise, conventional funds outperformed.  Average weighted calculations did not change relative results. 
  • That said, comparative results regarding the outperformance or underperformance of sustainable mutual funds and ETFs that key off reliance on entire asset classes or broad fund categories such as taxable bond funds or US equity funds, to name just two, may be subject to distortions that will influence the outcomes.   
  • Even before examining structural market factors that may contribute to periods of outperformance or underperformance, how various issues such as how to define sustainable funds, the inclusion or exclusion of actively managed and passively managed funds, combining ETFs and mutual funds into one group, including and excluding open-end funds and closed end funds, can lead to different and skewed results. In addition, reliance on averages, selection of time horizon(s) under consideration, differences in the profile of fund categories, including significant variation in fund sizes and differences in the number of funds in each category, will also impact fund level results.  The latter are especially important because sustainable funds are not as mature as conventional funds and fund categories, number of funds and fund sizes, which tend to me much smaller, can vary significantly and tilt the results.
  • As a result, studies claiming trends of outperformance by sustainable funds compared to conventional funds should be approached cautiously and examined very critically by investors. 
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Research and analysis to keep sustainable investors up to-date on a broad range of topics that include trends and developments in sustainable investing and sustainable finance, regulatory updates, performance results and considerations, investing through index funds and actively managed portfolios, asset allocation updates, expenses, ESG ratings and data, company and product news, green, social and sustainable bonds, green bond funds as well as reporting and disclosure practices, to name just a few.

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Many questions have surfaced in recent years regarding sustainable and ESG investing.  Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation.  While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories:  Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration.  In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices.  That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

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Thoughts and ideas targeting sustainable investing strategies executed through various registered and non-registered sustainable investment funds and products such as mutual funds, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), closed-end funds, Real Estate Investment Trusts (REITs) and Unit Investment Trusts (UITs). Coverage extends to investment management firms as well as fund groups. 

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