The best sustainable funds of 2022 face a tough market
After years of strong performance, sustainable investing mutual funds took a beating in 2022, but a handful of strategies were able to outperform.
The catch: Some of them have been boosted by energy stocks, investments that some investors in environmental, sustainability and governance funds try to avoid.
This year has been difficult for many ESG funds. Energy stocks were the best performers, but most sustainable strategies hold little or no oil company stocks due to the link between oil and gas consumption and climate change. At the same time, sustainable funds tend to have outsized weightings in tech stocks, many of which have been battered in 2022.
As a result, 65% of sustainable US equity funds are at the bottom of their rankings in the Morningstar category in terms of year-to-date performance. Like any strategy, sustainable funds can outperform or underperform over shorter periods. Over longer periods, ESG funds have, on average, performed well, with 53% of US equity ESG funds in the top half of their category.
Despite headwinds in 2022, six sustainable funds covered by Morningstar analysts rank in the top half of their categories. Five of them have a Bronze or Silver Morningstar Analyst Rating. For the most part, their strong performance in 2022 is not limited to this year alone. Over the past five years, four of the six funds have ranked in the top 10% of all funds in their respective categories.
Calvert Equity CEYIX is among the ESG funds that managed to rank in the top quarter of its category, with a year-to-date performance nearly 6 percentage points above the average for high-growth funds. Calvert Equity benefited from a lighter weighting in technology stocks than most funds in the category. Only 20% of the portfolio is invested in technology stocks, compared to an average of 35% for high growth funds.
Calvert Equity also outperformed on its avoidance of Facebook parent company Meta Platform’s FB stock due to concerns about the company’s governance practices. Meta stock is down 40.9% this year.
Calvert’s exposure to commodity materials was also positive. Morningstar Managing Partner Tony Thomas notes that most ESG-focused peers barely invest in basic materials. But Calvert’s December 2021 portfolio held 7.2% of its assets in this sector.
The fund’s outperformance is not limited to the period since the beginning of the year. Over the past five years, Calvert Equity has ranked in the top 10% of its peers.
The Calvert US Large-Cap Growth Responsible Index CGJIX also outperformed in the high growth category, losing 19.46%. The fund tracks the Calvert US Large Cap Growth Responsible Index, which targets growth companies that operate in a manner consistent with Calvert’s responsible investment principles, writes Morningstar associate analyst Lan Anh Tran.
Amana Growth AMIGX was supported for another reason: a large cash stake that protected investors against the stock market decline. Amana held 9.3% of its portfolio in cash compared to an average of 1.9% in the category as of May 31.
The fund was also boosted by its holdings in biotech companies Eli Lilly LLY and Amgen AMGN, according to Morningstar Direct. The fund’s sole materials holding, Newmont NEM, also boosted the fund’s performance, with the stock gaining 12.6% on the year to June 2.
This marks a turnaround for the fund, writes Morningstar senior analyst David Kathman. “The same stocks made the fund trail its peers through the last nine months of 2020, when riskier, aggressive growth names led the pack, but in 2021 the fund looked great, ranking in the top 5% of the Morningstar High Growth category. .”
Large Scale Mixed Funds
The average broad-blend fund is down 11.4% this year, but Amana Income AMINX has outperformed along with other income-focused funds in the category, which have performed well as investors seek income stability dividends in a difficult market.
Down just 9% so far in 2022, Amana Income has benefited from its healthcare picks, including Eli Lilly, Bristol-Myers Squibb BMY and AbbVie ABBV, according to Morningstar Direct. Kathman writes that “managers look for stocks that pay a dividend and have higher yields than the S&P 500, but also have reasonable price-earnings ratios and consider age-old ESG factors when deciding which stocks are attractive.”
Pioneer PIODX lands in the basket of ESG funds that performed well in 2022 thanks in part to its holdings in energy stocks. The fund held a 3.8% stake in Schlumberger SLB as of April 30 and a 2.5% position in EOG Resources EOG. Schlumberger is up 64.4% in 2022 and EOG up 67.1%.
“A surprising part of the fund’s outperformance is due to an overweight in energy, a sector it has been underweight in recent years,” said Morningstar analyst Jack Shannon. “They only have two positions in the sector, but they recently bought EOG in September and have increased their stake in it by more than 40% since February, which has paid off.”
Small Cap Funds
Similarly, in the small blends category, Boston Trust Walden Small Cap BOSOX outperformed in part due to its energy exposure. “Unlike some ESG offerings, this team is willing to own companies in the energy and materials sectors,” writes Andrew Daniels, associate director at Morningstar. “In the energy sector, the team believes that drilling company Helmerich & Payne HP and wellhead manufacturer Cactus WHD have strong operating positions in addition to low ESG risks relative to their peers.”
The fund’s portfolio also ranks as one of the least volatile options on small mixes, contributing to an excellent long-term performance track record on a risk-adjusted basis, Daniels writes. The fund ranks in the 5th percentile of all small mix funds for five-year returns.