ii ACE 40 performance review: Q1 2022

Here’s how interactive investor’s ethical funds performed in the three months up to the end of March.

ESG (environmental, social and governance) as a theme is facing its most difficult challenge since its rapid growth in the last few years. If ESG investing can’t deliver the same returns as conventional investing, then investors will have to choose between greater personal wealth or a benefit to society and the environment, which is far from optimal.

ESG’s struggles this year have come from the fact that ESG is inherently linked to 'growth' as a style. Maybe ESG companies are younger, smaller, or faster growing/adapting than more mature old-world companies, but growth as a style has really struggled this year, with rising interest rates and inflation making investors reconsider how much the future earnings of these companies are worth today.

In addition, the booming oil and gas prices have posed a question as to whether the companies involved in these industries can be ignored. Furthermore, booming commodities prices in some areas have hurt ESG companies more than others, for example lithium and nickel prices skyrocketing puts pressure on EV manufacturers.

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The boom in ESG has been an undoubtedly positive result for society and the planet as a whole. However, as the year unfolds, if ESG remains under pressure it will be interesting to see if ESG funds flew too close to the sun when gaining assets, and whether we will see a reversal in trends that undoes much of the good work these ESG leading companies have done.

ACE 40 performance

The troubles for ESG funds were seen clearly across the ACE 40 list, with only three funds delivering a positive absolute return in Q1, although the month of March was more fruitful as the Federal Reserve, America's central bank, projected 11 rate hikes by the end of 2023, which the market saw as a strong and decisive way to curb inflation and gave growth funds, and as a result ESG funds, a shot in the arm.

The best-performing funds were both from the Alternative Energy Sector, with VT Gravis Clean Energy Income and iShares Global Clean Energy ETF (LSE:INRG) gaining 5.8% and 4.6% respectively over the first quarter. These were also standout performers in their category, which delivered a negative return on average.

As a whole the sector was able to benefit from rising energy prices and the search for alternatives as oil and gas soared, but at the same time was hurt heavily by the rising rates and inflation story given the high growth of the sector. The exchange-traded fund (ETF) was able to outperform peers as it is naturally weighted to the larger and more mature companies in the sector, who are less exposed to the inflation story and able to take advantage of the positives to the sector. The same can be said of Gravis which, in its search for income, avoids the highest growth names and owns the mature, dividend-paying companies, which allowed them to be the top Alternative Energy fund for the quarter.

The other fund to deliver a positive return was FP Foresight Global Rl Infrastructure, which gained 1.8% as inflation drove infrastructure assets higher. The fund was moderately held back however by a focus on renewables and as such didn’t deliver as great a return as some infrastructure peers.

iShares MSCI EM SRI ETF (LSE:SUSM) lost 1.5%, making it the fourth-best performer on the list. Given energy is a tiny part of the MSCI EM index, being heavily underweight energy as this fund is, was not as significant as it would have been elsewhere. Additionally, the fund is underweight China and specifically avoids many of the big global Chinese names that were worst hit when the threat of sanctions began to loom.

Rounding off the top performers is Janus Henderson UK Responsible Income (-2%). Despite underperforming the UK Equity Income sector due to a 0% weight to BP and Shell, the fund still held up relatively well when compared to broader funds and especially ESG funds, given its value bias.

The worst-performing strategy on the list was Syncona (LSE:SYNC), the life sciences trust involved in cell therapy and gene therapy. The trust had ended the year well, with a sale to Novartis of one of the portfolio’s largest holdings, Gyroscope. This year however the share price of Syncona has fallen 24.5% and, although the published net asset value (NAV) has not changed, making this a swing from a premium to a discount, the listed parts of the portfolio have been hit hard. Most notably Freeline Therapeutics (NASDAQ:FRLN) continues to see declines, falling 40% so far this year and down 95% since the start of 2021. The portfolio’s listed and unlisted companies all suffer heavily from inflationary pressures as, by nature, they are either pre-revenue or engaging in trials and operations that will lead to future revenues, so rising rates and inflation make that future revenue worth less today.

The other poorest performing strategies on the list all have their growth bias to thank for their underperformance - Montanaro Better World -17% fared the worst, as it focuses on small and mid-cap companies, which also have suffered from the rising rate and inflation environment. Baillie Gifford Global Stewardship (-15.5%) and Liontrust Sustainable Future European Growth (-13.9%) both also suffered due to their growth style biases. Rounding off the worst performers is Impax Environmental Markets (LSE:IEM) (-14.4%) , which swung from a 10% premium to a 5% discount mid-quarter, although has since recovered that slightly. NAV performance was -8.2%, as the environmental companies the trust owns again tend to have a growth bias.

Top five ACE 40 funds in Q1 2022

Source: Morningstar TR GBP.

Bottom five ACE 40 funds in Q1 2022

Source: Morningstar TR GBP.

Top five ACE 40 funds over five years

Source: Morningstar TR GBP.

Bottom five ACE 40 funds over five years

Source: Morningstar TR GBP.

Most-bought ACE 40 funds in Q1 2022

Most-sold ACE 40 funds in Q1 2022

Changes to the ACE 40 list (under review/developments)

No changes in Q1 2022.