Investors yanked money out of U.S. sustainable funds at a rapid pace in the second quarter, marking the funds’ first quarterly outflows in more than five years.
U.S. sustainable mutual funds and exchange-traded funds shed $1.6 billion to stand at $296 billion of total assets at the end of June—the lowest level since the first quarter of 2021, according to a new report from Morningstar. This marks a 17% fall from the record $358 billion in sustainable funds at the end of 2021.
The fall comes amid heightened fears of a recession in the U.S., sky-high inflation and interest rates, and a global energy crisis, says Alyssa Stankiewicz, associate director of sustainability research at Morningstar. Stil, the outlook for sustainable funds “remains bright,” she adds.
“Despite outflows across the board, the US. sustainable funds market is continuing to grow at a faster rate than the total U.S. market: In the first half of 2022, sustainable funds grew by 2.5%, while the broader U.S. market shrunk by 0.39%, in terms of the organic growth rate,” Stankiewicz says. “Given the recent poor performance of sustainable funds and increasing scrutiny of sustainable investing overall, this continued growth indicates ‘stickier’ demand for these strategies.”
One bright spot in the U.S. this quarter: Flows into sustainable bond funds remained positive, with $804 million of new money added compared with taxable and municipal bond funds, which lost $150 billion during the same period.
“We’ve seen steadily increasing demand for sustainable fixed-income funds,” says Stankiewicz. “One major driver is that asset managers in recent years have started to launch and repurpose more fixed income offerings to adopt sustainable mandates. Ultimately, that helps investors fill out a more diversified portfolio in line with a sustainable mandate.”
Morningstar said U.S. sustainable active funds—across asset classes—bore the brunt of the outflows in the recent quarter, shedding $1.2 billion. Sector equity funds, including many clean energy funds, were among the hardest hit. “Against the backdrop of the continuing volatility in energy markets and record high gasoline prices in the U.S., investors shied away from downtrodden renewable energy funds,” says Stankiewicz.
Global sustainable mutual funds and ETFs attracted $32.6 billion of net new money in the quarter, a fall of 62% compared with $87 billion of inflows in the first quarter. Total assets slipped to $2.47 trillion at the end of June. Morningstar said the 13.3% quarterly fall was “less pronounced than the 14.6% decline for the broader market.”
The turmoil in global markets didn’t stop asset managers from launching new products or repurposing conventional funds into sustainable offerings, however. In the second quarter, 245 new sustainable funds launched, while 45 funds in Europe and four U.S. funds were repurposed to adopt sustainable mandates, according to Morningstar.
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