Dozens of mutual funds have reinvented themselves as ESG funds. How much have they really changed?
As asset managers have launched new funds with an environmental, social, and governance focus, they have also repurposed existing mutual funds and exchange-traded funds as ESG products. As of March 31, there were 555 ESG open-end funds and ETFs, and since January 2019, 65 of those were repurposed from existing strategies, says Alyssa Stankiewicz, a research analyst at Morningstar. From 2021 to 2022’s first quarter, asset managers repurposed 26 funds.
The allure is obvious. There is some $17 trillion sloshing around in ESG strategies, according to US SIF, a trade group that tracks sustainable investments. The U.S. sustainable universe has grown at a compound annual rate of 14% since 1995, when US SIF began compiling data, with the most rapid growth occurring since 2012.
While actively managed mutual funds continue to lose assets overall, actively managed sustainable funds have seen inflows, according to Stankiewicz. Of the 65 funds repurposed over the past three years, 40 had outflows in the year leading up to their strategy change, she says.
“There are likely some advantages to repurposing a fund, especially when it’s not your most popular fund, versus starting from scratch and building out the infrastructure there,” she says.
Six biggest U.S. funds that were repurposed into ESG funds in 2021 and 2022.
|Fund / Ticker||Assets (mil)||Inception Date||ESG Start Date||Last Non-ESG Year Net Flows (mil)||Last Non-ESG Year Return (Percentile Rank)*|
|Pioneer / PIODX||$7,290.9||2/10/1928||7/9/2021||110.5||8|
|Palmer Square Income Plus / PSYPX||1,045.1||2/28/2014||4/30/2021||239.5||1|
|American Century Balanced / TWBIX||958.6||10/20/1988||1/9/2021||-29.7||45|
|AMG Boston Common Global Impact / BRWIX||663.5||12/30/1985||3/19/2021||-103.5||64|
|Nationwide BNY Mellon Core Plus Bond ESG / NWCIX||636.8||7/17/1992||2/28/2022||-471.8||27|
|AMG GW&K ESG Bond / MGFIX||611.9||6/1/1984||3/19/2021||-179.9||70|
|RBC BlueBay High Yield Bond / RGHYX||290.5||11/30/2011||9/17/2021||93.4||7|
|Pioneer Global Sustainable Equity / GLOSX||278.2||12/15/2005||2/15/2022||31.0||8|
|JPMorgan Small Cap Sustainable Leaders / VSSCX||191.6||12/31/1996||7/1/2021||-184.0||37|
|FCF US Quality / TTAC||183.9||9/27/2016||3/1/2021||38.3||91|
|ClearBridge All Cap Growth ESG / CACG||172.5||5/3/2017||7/1/2021||-8.5||70|
Note: Data through March 31. *Denotes percentile rank of the fund in its category.
In the third quarter of 2021, the $191 million JPMorgan Small Cap Sustainable Leaders fund (ticker: VSSCX), which launched in 1996 as the JPMorgan Small Cap Core fund, became an ESG-focused fund. It was the largest fund by assets to repurpose that quarter. In the year before revamping, it lost $184 million in assets, says Morningstar. Phil Hall, the fund’s manager since 2010, says the decision to repurpose wasn’t about outflows—it was in response to investor interest, as there were few small-cap actively managed ESG funds.
“It’s an area where you don’t have much research coverage. So, it’s exciting and something than can drive returns,” he says, noting the fund remains one of the few ESG active small-cap offerings.
The fund also became more concentrated, holding 86 companies versus about 400 previously, jettisoning energy names such as Select Energy Services (WTTR) and basic materials company Arch Resources (ARCH). While it added a sustainability mandate to its criteria, its overall objective of investing in small-caps for the long-term with a value focus didn’t change.
Some fund firms moved to transform several funds at once, including BlackRock in 2021, when it repurposed three. Abrdn changed five funds, one in February 2019 and four in December 2020, including the $396 million Abrdn US Sustainable Leaders (GXXAX). The United Kingdom–listed firm repurposed lower-asset funds—three of the five had less than $100 million in assets—in anticipation of higher demand for ESG, says Ralph Bassett, head of U.S. equities at Abrdn, and to get a fresh track record started.
All five funds experienced outflows in the previous year, but Bassett says that’s a coincidence, noting the general outflows from active mutual funds. “This was more proactive from our standpoint,” he says. BlackRock declined to comment.
WisdomTree repurposed three of its ETFs in 2020 that had seen outflows, including the $71 million WisdomTree U.S. ESG (RESP), giving them new names and ticker symbols to reflect the new ESG mandate. The decision to repurpose rather than launch new funds was driven by efficiency, since there were significant correlations with existing strategies, says Ben Wallach, WisdomTree’s head of product development. While outflows didn’t factor into the repurposing, he says, “products that see great commercial success are not going to be typical candidates for restructuring.”
ClearBridge also updated two ESG funds in the third quarter of 2021, including the $172 million ClearBridge All Cap Growth ESG ETF (CACG), says Pierre Caramazza, head of U.S. product and specialty sales at Franklin Templeton, which took over the ClearBridge funds as part of its acquisition of Legg Mason in August 2020. All of ClearBridge’s existing funds already used ESG criteria, including All Cap Growth, but the term ESG was missing from the two fund names, Caramazza says, calling it an oversight.
Nothing about the process changed, but adding the ESG label and tweaking the language triggered an update in the prospectus, he notes. In the year before the rebranding, All Cap Growth ESG saw about $8.5 million in outflows, and Caramazza says not having ESG in the name may have contributed to that.
ESG investing has taken a bit of a reputational hit this year, with several high-profile critics, such as Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock, claiming that it doesn’t work. The strategy, known for its growth style, technology tilts, and reduced exposure to fossil-fuel stocks, has lagged behind broader-market indexes.
Repurposing may also come under further scrutiny. On May 23, the Securities and Exchange Commission fined BNY Mellon Investment Advisor $1.5 million to settle charges that the mutual fund manager misrepresented the ESG reviews it made of investments. The firm neither confirmed nor denied the charges. On May 25, the SEC proposed tightening rules on funds labeling themselves ESG.
It can be hard for an investor to tell if a fund has been repurposed for a new strategy, and, for funds that have longer track records, strategy changes are harder to pinpoint without obvious signs like a manager change. That makes glancing at long-term performance less reliable, and a lot of this can fly under the radar, says Aniket Ullal, head of ETF data and analytics at CFRA Research. Instead, investors will need to peruse a fund’s prospectus to make sure that at least 80% of the funds’ assets meet ESG mandates.