This year’s slump in U.S. technology stocks has the potential to drive many ESG investors toward Europe in search of better returns, according to a top-performing sustainable hedge fund.
While big-name technology companies such as Facebook owner Meta Platforms Inc. have long been mainstays of ESG funds, there are plenty of European companies that offer more enduring environmental, social and governance attributes, said Donald Pepper, co-chief executive of Trium Capital LLP.
“It’s been a great trade if you managed to get into that and get out halfway through last year; then you’ve had a terrific run,” Pepper said of tech stocks. But with a more hawkish Federal Reserve, “that gain is now suddenly a lot more risky. I think investors will start to look more broadly and say, gosh, I should now be looking again and dust off those European companies. They are really interesting.”
The Trium ESG Emissions Impact Fund, whose holdings include SSAB AB, Eramet SA and Centrica Plc, has returned 5.8% this year by avoiding big tech. That compares with a 0.8% decline for similar hedge funds on average, and puts Trium ahead of 97% of its peers after a volatile start to the year for the broader market, according to data compiled by Bloomberg.
The plight of tech stocks has dominated headlines in the first weeks of 2022. The Nasdaq Composite Index’s 9% slump made January the worst month since the panic selloff of the early days of the pandemic. Tech’s poor start to the year -- underscored by Meta’s stunning rout -- has dealt a sizable blow to a number of ESG funds.
The giant iShares ESG Aware MSCI USA is down about 6.5% this year. The BlackRock Inc. exchange-traded fund is packed full of tech stocks led by Apple Inc., Microsoft Corp., Amazon.com Inc. and Meta.
Analysts at Deutsche Bank AG recently pointed out that the different composition of ESG funds in the U.S. versus Europe has left the former more exposed to the shifting monetary climate. U.S. ESG funds have struggled more than their European counterparts, due mainly to their heavy reliance on tech, the analysts wrote on Jan. 27. European ESG funds, meanwhile, rely more on energy transition stocks.
“The nature of the U.S. market means that ESG funds...are very tech heavy,” the analysts wrote. “Note the big European funds are far less tech exposed and also that overall some funds are buying into energy companies because of their environmental transition plans. So as the market develops, ESG is becoming increasingly nuanced and complicated.”
Last week, senior executives at BlackRock wrote a letter to clients informing them of its bullish stance on energy firms poised to perform well in the transition from fossil fuels to renewables. The world’s largest asset manager, which last year predicted a “vast reallocation” in ESG, described such investments as an “under-appreciated opportunity.”
Net inflows into ESG exchange-traded funds reached almost $4 billion last week, the most since early July and well over four times the amount registered the previous week, according to data compiled by Bloomberg. So far this year, ETFs exposed to the energy sector have done well, with Xtrackers MSCI Europe Energy ESG Screened delivering the best total returns at 12%, the data show.