ESG funds are raking in the dough in 2019, pulling in $13.5 billion in new investor money in the first three quarters of the year, according to a recent report by Morningstar. But how is the “typical” ESG portfolio doing? It’s handily besting the S&P 500, returning more than 32% to the S&P’s 22%, through October. That’s a 45% outperformance.
Microsoft is the most widely held ESG stock.
Some explanation on the calculation is needed: Unlike the broad market with the S&P index or a sector index like the Dow Jones Industrials, there’s no at-a-glance way to judge the performance of ESG as sector. Why? ESG funds can cover a gamut of strategies, being bound loosely into the ESG category by being principle-driven rather than purely profit driven. This means some funds benchmark themselves against a broad market index like the Russell 2000, others license custom indexes to be their benchmark, and still others use one of a series of specialized ESG indexes from MSCI that encompass a large number of stocks. So to gauge how the average ESG portfolio is performing, I’ve developed a manageable index that reflects the 50 most held stocks in ESG funds.
The Kinsale ESG 50 Index tracks the performance of the most widely held stocks in ESG mutual funds ... [+]
The index extends the idea in my prior post on determining the most widely stocks in ESG funds. Called the Kinsale ESG 50 Index (after my research firm, Kinsale Insights), it’s an index weighted to reflect the level of holdings inside ESG portfolios (as opposed to overall market cap weighting of components, like the S&P). The 50 stocks represent more than 21 percent of all $75.8 billion ESG equity holdings, and are the most widely held among all ESG mutual funds and ETFs. This provides a quick benchmark for how the most common (but theoretical) ESG portfolio performed.
The ESG 50 index return of up 32.2% is based on total return as calculated through Portfolio Visualizer. That compares to 22.3% for the S&P 500 index through October. Performance in the ESG was driven by the gains in Microsoft Corp., which returned 42.8% in the first three quarters of the year. Microsoft is the most held ESG stock and holds the most weight in the Kinsale ESG 50 index at about 13%. Performance was also driven by Mastercard, Danaher Corp., Google, Disney and Lam Research, the last of which is the best performing stock of the top 50, with a 94% return this year through October. Stocks contributing a negative return in the ESG space are few, probably because of the booming general market. Clorox, Gap and Regeneron Pharmaceuticals generated the most drag with negative total returns year-to-date, according to Portfolio Visualizer.
How reflective is my index to actual fund performance? Examining only funds that have been open since the start of the year (many ESG funds have been launched this year), most fall short. This could largely be because the 50-stock index overweights fund managers’ favorite stocks compared to their weightings in the funds. That is, by its construction the Kinsale ESG 50 index cherry picks portfolio managers’ highest confidence bets (most ESG funds are actively managed). Among mutual funds, the Calvert Equity Portfolio comes closest to my theoretical return, with a 29% to 30% return YTD depending on the class of fund shares.
Interestingly, a number of ETFs best the index performance, led by the Invesco Solar ETF (TAN), up more than 51% through October, according to data from Koyfin. The ALPS Clean Energy ETF (ACES) returned just over 39% to post second-best performance, while the Invesco Wilderhill Clean Energy ETF (PBW) and SPDR Kensho Clean Power ETF each returned about 37%. As I noted in my prior post, ESG funds as a group are surprisingly light on environmental stocks. Based on the outsized gains of the ETFs listed here with their heavy emphasis on clean energy equities, the lack of environmental stocks is a deficiency that has dragged on ESG performance in 2019.
