Morgan Stanley ESG fund raised near record amount in Japan

$3.6 billion fund the biggest Japanese offering in two decades.

A bet on ESG and a rush among Japanese investors to own foreign stocks, particularly in the technology space, has proved to be a winning combination for a fund managed by Morgan Stanley Investment Management in the Asian nation.

Launched last month, the Global ESG High Quality Growth Equity Fund, run by the U.S. asset manager and owned by Japan’s Asset Management One Co., raised an initial amount of $3.6 billion, the most for a new offering in Japan in 20 years, according to data compiled by Bloomberg. That’s also the second-biggest launch ever among all stock funds in the nation, behind the Nomura Japan Equity Strategy Fund.

The new offering adopts a strategy similar to Morgan Stanley’s $15.6 billion tech-heavy Global Opportunity Fund, with eight of its 10 biggest holdings being the same. The top four stocks — Inc., TAL Education Group, Mastercard Inc. and ServiceNow Inc. — account for about 30% of the portfolio for each fund.

“We want to have a good impact but also get the best returns for our shareholders,” Kristian Heugh, the manager of the fund at Morgan Stanley, said in an interview. “ESG is absolutely critical for the market to look at, for companies to look at, but we want to make sure that people don’t get too far in one direction or another because otherwise, it’s not going to work.”

The coronavirus pandemic has driven a global push toward sustainable investing, with increased focus on factors such as health and climate change spurring corporations to adopt higher ESG standards. Bank of America said last month that flows into ESG strategies in 2020 were four times greater than in 2019 on a year-to-date basis.

Heugh’s team ranks stocks based on the firm’s internal scoring system, which takes into account the “qualitative aspects” of businesses in measuring a company’s performance, categorizing them into gold, silver and bronze ratings., for example, has a silver rating.

E-commerce companies like have “some very positive impacts” to society by reducing cost and carbon footprint through its web-based services, according to Heugh.

“You can make a difference and get profitability at the same time by focusing on these issues,” he said.

The virus outbreak has seen retail investors around the world piling into shares of companies linked to technology and data-driven businesses. These stocks, along with health-care names, have been at the forefront of the rebound in global equities from their March lows.

The new fund has about 44% of its assets in information technology shares, according to its factsheet. That’s versus almost 35% for the Global Opportunity Fund, which has beaten 97% of its peers over the past one month.

The ESG fund’s net asset value rose 1.7% on Wednesday, the most since its inception on July 20, amid broad gains in global technology shares.

Japan has “one of the largest home-market biases in the world,” Heugh said. “It’s been very impressive to see that mindset change.”