The sustainable funds weathering the style storm

Only a tenth of funds on interactive investor’s sustainable long list have made money so far this year. Faith Glasgow explains why, and names the funds that have bucked the trend.

It is no overstatement to say that, on the whole, sustainable-focused funds have had a particularly torrid time of it so far in 2022.

Of almost 140 open-ended funds on interactive investor’s long list of sustainable investments available to UK retail investors, only a tenth have managed a positive return over the year to 31 August; among the 40 passive funds on the long list, just one achieved positive returns of any significance.

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However, it’s a distinctly different story in the closed-ended universe. There are 22 investment trusts categorised as sustainably focused on the ii long list, of which 14 have seen a share price uplift this year. Some have achieved meaty returns of 20% or even 30% plus.

Why sustainable funds have struggled this year

What’s going on? It’s not hard to fathom out why so many sustainable funds have struggled over recent months, as inflation, rising interest rates, war in Ukraine and growing fears of recession have knit together to cast a blanket of gloom over stock markets generally - and in particular over the technology and other future-facing growth companies on which sustainable funds tend to focus.

At the same time those funds typically steer clear of ‘sin’ stocks including miners, energy and defensives such as tobacco that have performed pretty well this year.

This raises the question of why the investment trusts in the sustainable long list in particular have seen robust returns from so many constituents. A closer look at the performance tables highlights the concentrated areas where green investment activity has thrived.

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Winners and losers

While biotech and healthcare, such as Syncona (LSE:SYNC), specialist property, such as Civitas Social Housing (LSE:CSH), and broader environmental trusts (Jupiter Green (LSE:JGC) and Impax Environmental Markets (LSE:IEM) have all stumbled painfully - especially the latter group – the renewable energy infrastructure funds have romped away, buoyed by rocketing oil and gas prices.

That linkage might seem bizarre, but as Julia Dreblow, founder of the sustainable fund analysis service SRI Services, explains: “The overall energy price is dictated by the predominance of gas. So even though the cost of producing solar and wind energy hasn’t changed, the whole market is paying a price based on what’s going on with gas supplies.”

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In the closed-ended sector, then, it’s the focused energy infrastructure investment trusts including JLEN Environmental Assets (LSE:JLEN), NextEnergy Solar (LSE:NESF) and Greencoat UK Wind (LSE:UKW), that dominate the list of positive performances. The respective year-to-date returns are 31%, 26.1% and 21.5%. 

In the passives list, iShares Global Clean Energy (LSE:INRG) – the lone alternative energy ETF – similarly stood out as the high performer. It’s up 22.8% year-to-date, driven by the same energy price trends.

Specialist alternative energy funds are few and far between in the open-ended sector, but John Ditchfield, chair of the responsible investment consultant Impact Lens, picks out the VT Gravis Clean Energy Income fund. 

Top 10 performing sustainable funds so far in 2022

*Data from 1 January 2022 to 31 August 2022. Source: Morningstar. Past performance is not a guide to future performance. Investment trust performance is share price returns. 

Income focus pays off  

“It has performed very well during 2022, with a 15% return year-to-date,” he says. “This is for several important reasons; first, the fund holds installed renewable energy generation capacity and also battery storage, another strong investment trend driven by spiralling energy costs. But it also delivers yield, and income is popular with investors during a period of risk aversion, increased inflation and low cash rates.”

The income effect may well have helped one or two other broad-based open-ended funds in the ii long list to achieve modest performance so far in 2022, with BNY Mellon Sustainable Global Equity Income (up 1.7%) being a case in point.

Open-ended general infrastructure funds, including the global and UK income offerings from FP Foresight and M&G Global Listed Infrastructure, have also gained ground – again, likely assisted to some extent by their income focus.

Among the open-ended long list there’s also more geographical diversity, and sustainable funds with Indian exposure stand out. Ditchfield notes that the Alquity Indian Subcontinent fund did well, managing a percentage return of 10% year-to-date.  

“This is because India has stood out among emerging economies by keeping inflation low and continuing to grow its economy, facilitated by its rapidly growing workforce,” he explains. A similar dynamic underpins Stewart Investors Indian Subcontinent Sustainability’s 7.7% return.

Overall, though, this has clearly been a difficult period for sustainable investment funds because of the sectors in which they tend to invest and those they tend to avoid.

However, stresses Dreblow, these are exceptional times. “Covid and the war in Ukraine have caused serious upset, but the fundamentals of our future prosperity are unchanged. Transitioning to net zero is not optional, and companies that manage environmental and social issues well will be better placed to succeed over the longer term than those that do not. These are no longer ‘nice to haves’: the business and regulatory landscapes have shifted. Investors know this.”