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Portfolio > Mutual Funds > Bond Funds

Sustainable Fund Performance Beats Peers: Morgan Stanley

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Sustainable investing is hitting its stride, not only in net inflows, which Morningstar pegs this year at $26 billion through August, but in performance, in which U.S. sustainable equity and bond funds both outperformed peers through June, according to Morgan Stanley’s Institute for Sustainable Investing 2020 report.

This builds on 2019, in which U.S.-based sustainable equity funds outperformed their traditional peers by a median 2.8%, while U.S.-based sustainable taxable bond funds outperformed their peers by a median of 0.8%.

In 2020, U.S. equity traditional funds overall through June are down 8.7%, while sustainable counterparts were down only 4.8%. U.S. taxable bond funds overall were up 0.9% over the same period, while sustainable bond funds were up 3.2%.

Morgan Stanley concluded that the last 18 months have brought “both tremendous expansion and unprecedented challenges in the capital markets,” however “sustainable investments have continued to perform well in both environments … further dispelling the myth that investors seeking to ‘do well by doing good’ face a financial trade-off,” states the report.

The bank studied more than 11,000 U.S. mutual funds and ETFs, noting “evidence that funds incorporating environmental, social and governance criteria can potentially provide financial returns in-line, if not better than traditional funds, and with less downside risk,” it stated.

Large-Cap and Growth

The study also found that sustainable funds favored large-cap and growth stocks, whereas traditional funds favored large-cap and a blend of growth and value stocks.

In addition, and perhaps not surprisingly, sustainable funds had a lower Carbon Risk Rating by 1.29 (7.44 vs. 8.73).

As the study found, “sustainable investing is now firmly in the mainstream. Half of U.S. individual investors are adoptees and 80% of asset owner institutions are integrating sustainability considerations into their investment process,” according to surveys done by the institute.

Indeed, during the 2020 Morningstar annual conference this week, Jon Hale, Morningstar’s global head of sustainable research, pointed to a Morgan Stanley study showing 85% of the general population and 95% of millennials were somewhat or very interested in sustainable investing, which has been growing.

He also pointed out the growth of new launches of sustainable ETFs and open products, with 43 new launches through July this year, compared with 38 launches in all of 2018. Also, flows into these funds in 2019 were four times greater than previous years, and in 2020, despite the pandemic, flows through July surpassed last year’s record, Hale said.

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