All the Buzz - Buyer Be Aware

September 13, 2021

Over the last few years there has been a significant interest in ESG or environmental, social and governance investing. People want their investments to reflect their values.

Our investment group started focusing on this specific area of investing two years ago so our clients who desire aligning their dollars with their desires can fulfill this purpose. Unfortunately, this movement has caught the attention of some money managers that are using it as a way to attract investors to under performing funds that aren’t ESG focused at all. They are misrepresenting some funds by changing the names of specific funds to sound “Green” in name only.

This article by Shane Shifflett of The Wall Street Journal further addresses this issue and some of the funds that are creating this misunderstanding.

ARTICLE HIGHLIGHTS:

Funds Go Green, but Sometimes in Name Only

Fund companies are rebranding their out-of-fashion investment offerings as green, hoping to grab a portion of the cash pouring into sustainable products. In some cases, the rebranding has been in name only.

Last year, companies that manage mutual funds and exchange-traded funds rebranded a record 25 funds as sustainable, according to Morningstar. They say these funds have adopted investment strategies that utilize data on companies’ environmental, social and governance performance to pick stocks. Since 2013, fund companies have rebranded 64 funds, which had $35 billion in assets as of June.

The American Century Fundamental Equity Fund is now the Sustainable Equity Fund, the USAA World Growth Fund is the USAA Sustainable World Fund and the Putnam Multi-Cap Growth Fund is now the Putnam Sustainable Leaders Fund. Assets for all three are up since the rebrandings.

Many of these funds are actively managed and were experiencing chronic outflows prior to rebranding, said Morningstar Head of Sustainability Research Jon Hale. “You have big fund companies with an inventory of funds, a lot of which aren’t really attracting assets anymore, saying ‘OK, here’s this new investment trend happening; what do we do?’” Mr. Hale said.

The shift is akin to a car company freshening up a tired model. Actively managed funds, which are run by stock pickers, have been losing investor cash for years. Similar funds with a sustainable label have been raking in money, according to Morningstar.

Of the 64 rebranded funds, 35 were suffering from investor withdrawals in the three years before they went green, according to a Wall Street Journal analysis of Morningstar data. At 13 of the funds, investors began putting in cash again. At 45, new cash plus the rising stock market have boosted overall assets.

The $1.5 billion USAA Sustainable World Fund holds nearly $100 million in shares of 47 fossil-fuel companies, according to data from shareholder advocacy group As You Sow, the most of any repurposed fund. Last year, Victory Capital Management Inc. changed the fund’s name from USAA World Growth Fund.

A disclosure was added to the fund’s prospectus noting ESG ratings are considered but fund managers may disagree with a raters’ conclusion. The Sustainable World Fund continued to hold shares of companies such as mining firm Rio Tinto PLC and purchased shares in oil-and-gas companies after rebranding.

“We believe incorporating ESG considerations into a portfolio should be an input under a larger mosaic of considerations any manager evaluates to achieve a well-balanced, diversified portfolio,” said Mannik S. Dhillon, president of VictoryShares & Solutions, an investment adviser for USAA.

Investors had been pulling cash out of American Century Investment’s Fundamental Equity Fund for years before its 2016 rebranding. Three years later and under a new name, the Sustainable Equity Fund brought in a net $1.7 billion.

“To us, that was an affirmation that we made the right changes,” said American Century Vice President Joe Reiland. “The performance was getting better, the investment community was more interested in investing sustainably and it made us more marketable to clients.”

AUTHOR:
Shane Shifflett
The Wall Street Journal | September 9, 2021