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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.
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.
Stock and bond fund investors benefited from a rebound in 2023
Markets continued to rally in December, fueled by the combination of a strong economy and reduced concerns of a looming recession, better-than-expected corporate earnings, lower inflation and an apparent end to the Federal Reserve’s interest rate hikes that were expected to lead to multiple Fed rate cuts in 2024. Stocks, as measured by the S&P…
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The Bottom Line: Investors who held on to stocks after the decline of 18% in 2022 were rewarded but bond investors need more recovery time.
Markets continued to rally in December and equities in particular delivered unexpectedly strong gains in 2023
Markets continued to rally in December, fueled by the combination of a strong economy and reduced concerns of a looming recession, better-than-expected corporate earnings, lower inflation and an apparent end to the Federal Reserve’s interest rate hikes that were expected to lead to multiple Fed rate cuts in 2024. Stocks, as measured by the S&P 500, posted a gain of 4.5% in December and a full year increase of 26.3%, with 65% of the gain being registered during the last two months of the year. The results overcame last year’s 18.1% decline. Technology stocks, further bolstered by optimism surrounding the boom in artificial intelligence, drove the broader market’s returns, catapulting 55.1% higher for the year per the Nasdaq 100 Index. Across large-cap stocks, the technology sector was the top performer, gaining 56.4% with Communications Services not far behind with a gain of 54.4%. Only three sectors registered declines, including Utilities, Energy and Consumer Staples, down 10.2%, 4.8% and 2.2%, respectively. Mid-cap and small-cap stocks posted lower gains, adding 14.4% and 13.9%, respectively. At the same time, credit markets continued to rebound, gaining 3.8% in December and 5.53% for the full calendar year, according to the Bloomberg US Aggregate Bond Index. Last year’s gain was not yet sufficient to overcame 2022’s 13% decline. Longer dated bonds in some segments and lower rated bonds scored double digit returns.
Overseas markets, including developed and emerging markets, measured by the MSCI ex USA Index, added 5.02% in December and 15.6% for the full year.
Sustainable mutual funds and ETFs recorded a combined gain of 5.1% in December and 13.5% over calendar year 2023. Sustainable equity funds added an average 16% in 2023, the same increase recorded by Allocation funds, while sustainable fixed income funds gained an average 7.0%.
Sustainable long-term funds end the year with $331.7 billion in assets, adding $36.8 (net) attributable to market gains
Sustainable long-term fund assets under management attributable to mutual funds and ETFs added $12.4 billion, or 4.2%, in net assets in December to end the year at $331.7 billion. This was the highest month-end level achieved in 2023, reflecting a $36.8 billion net increase since the start of the year due entirely to strong market gains that were bolstered by the fourth quarter results achieved in both the stock and bond markets.
Top 10 performing funds gained an average 36.8% in 2023
The top 10 performing funds in 2023 registered an average total return gain of 36.8%, with each fund beating the S&P 500 Index by a minimum of 4.5%. Results range from a low of 30.7% to a high of 55.3%. The top 10 funds registered an average gain of 4.5% in December, in each but one case also beating the S&P 500 Index that added 4.5% in December.
The top performing funds were dominated by large cap growth funds that, in addition to the blended large cap Vanguard FTSE Social Index Fund, were heavily invested in the technology sector. The top performing fund, the index tracing Invesco ESG NASDAQ 100 ETF, includes securities of 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market LLC based on market capitalization that also meet the specified environmental, social and governance criteria. The criteria relies on negative screens that exclude companies engaged in certain business activities, or companies that are excluded based on their involvement in controversial business activities, or companies that fail to achieve a minimum ESG risk score, as determined by Sustainalytics. In addition, eligible companies must be compliant with the principles of the UN Global Compact. The top 10 companies at year-end, which accounted for 52% of the fund’s assets, were dominated by technology firms, with additional exposure to consumer cyclical companies and communications services. In total, these ten firms posted an average return of 87.4% during the trailing 1-year period. Leading the pack were NVIDIA Corp., Advanced Micro Devices, Inc. Broadcom, Inc and Tesla, Inc. that gained an average of 133.2%. Two of these stocks, namely NVIDIA (with the highest ESG rating assigned by MSCI) and Tesla (with an average ESG rating assigned by MSCI) were the most widely held holdings. These were both held in eight of the nine eligible portfolios at levels ranging from a low of almost 2% to a high of 13%.
The one exception in the roster of the top performing funds is the KraneShares California Carbon Allowance Strategy ETF (KCCA). This $268.7 million investment fund, classified as a commodity fund, was launched in October 2021. KCCA seeks to provide a total return that tracks the performance of the IHS Markit Carbon CCA Index, which is an index comprised of futures contracts on emission allowances issued by a “cap and trade” regulatory regime that seeks to reduce greenhouse gas emissions over time in an effort to curb climate change. provides targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. The fund registered a decline of 16.7% in 2022.
Bottom 10 performing mutual funds and ETFs in 2023 drop 36.5% in 2023
The bottom 10 performing funds in 2023 are all thematic ETFs with narrower mandates to invest in clean energy, renewable energy, such as solar, wind or hydrogen, electric vehicles and carbon offsets. Some of the funds are quite small, with five funds managing under $10 million in assets as of year-end. In two instances, the funds are levered.
While some funds recovered a bit in December , the ten funds were down broadly, recording an average decline of 36.5%, pulled down by the -90.1% recorded by the KraneShares Global Carbon Offset Strategy ETF (KSET). The small $900,000 sized fund at year-end tracks the performance of the S&P GSCI Global Voluntary Carbon Liquidity Weighted Index which is an index comprised of futures contracts on voluntary carbon offset credits which represent projects that seek to reduce the impact of greenhouse gas emissions in an effort to curb climate change. Even if this fund is excluded, the average performance of the nine remaining funds is -30.5%.
The performance of clean energy stocks was influenced by a variety of factors, including market conditions noted above, policy changes, technological advancements, restrictive trade measures and supply chain constraints. For comparison purposes, The S&P Global Clean Energy Index registered a decline of 20.1% for the calendar year.
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