A lot less money poured into mutual and exchange-traded funds in the first quarter, but sustainable funds held up better.
Flows into global mutual and ETFs plummeted by 73% in the first quarter of 2022, to $138 billion from $517 billion in the previous quarter, according to a new report from Morningstar . Global sustainable funds attracted close to $97 billion of net new money over the same period, a drop of nearly 36%. That was the sharpest quarterly slowdown in sustainable fund net inflows in three years.
Assets in sustainable mutual funds and ETFs globally slipped to $2.77 trillion in the first quarter, down 4% from the fourth quarter of 2021.
Hortense Bioy, global director of sustainability research at Morningstar and author of the report, said she was encouraged that investors continued to put money into sustainable funds, despite lagging performance in the first quarter.
“The [sustainable investing] trend continues,” she said. “There is a growing appetite from investors for sustainable funds. And at the same time, you see asset managers offering more options to those investors.”
Inflation and the war have weighed on the performance of ESG funds this year. That is especially true of funds underweight oil and gas stocks, which typically don’t make it past environmental, social and governance, or ESG, screens. The energy sector has been a strong performer this year, while technology, which many ESG funds overweight, has suffered.
In the first quarter, all large-cap U.S. stock funds fell an average of 5.6% on an asset-weighted basis, according to Morningstar. The ESG funds in the group fell almost 7% in the three months ended on March 31.
“Despite these short-term headwinds, which probably have a negative impact on the short-term performance of these funds, that didn’t put investors off, because they’re focusing on the long term,” Bioy said. “Investors in sustainable funds tend to be more focused on long-term returns than more traditional investors who tend to be more jittery, or are moving money around, when there is volatility in markets.”
In the U.S., assets in sustainable funds totaled $343 billion at the end of the first quarter, down 4% from the record high of $357 billion at the end of 2021. Assets in the overall market fell by 6% over the quarter, to $26.5 trillion.
Net flows into U.S. sustainable funds fell to $10.6 billion, a drop of 26% compared with the previous quarter, and nearly half of the record of nearly $22 billion in the first quarter of 2021. Flows into the broader U.S. market dipped by 65% to $85.7 billion.
While sustainable equity funds flows have fallen steadily over recent quarters, flows into sustainable bond funds have risen in the U.S., Morningstar said. In the first quarter, sustainable fixed-income funds attracted a record $3.2 billion, up 9% from the previous period. “More fixed-income choices help investors fill their bond allocations, making ESG-focused multiasset portfolios more viable and help drive more flows,” the firm said.
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