Sustainable multi-asset funds battling a challenging year

Square Mile’s Alex Farlow says they had a tougher time than their non-responsible peers but points to some notable exceptions

Last year proved difficult for multi-asset investors, who had few places to hide amid a global rout of both equity and fixed-income assets. Among sustainable and ESG-integrated funds, this was amplified by a structural bias towards growth-orientated equities, which were hit hardest.

The key driver of negative returns in 2022 stemmed from higher inflation and the speed and ferocity of interest rate hikes as central banks reacted. The immediate effect was the widespread selling of risk assets, with most sectors down heavily during the first quarter. Elsewhere, fixed income securities failed to provide protection against equity market volatility, as yields on government bonds and credit rose due to their sensitivity to rising rates.

Sustainable multi-asset strategies were generally more challenged than their non-responsible peers, with around two-thirds underperforming their respective sectors in 2022. The equity exposure of these funds is typically focused on growth assets, which are most sensitive to interest rates changes.

In addition, funds with ethical exclusions generally would have zero exposure to energy, which was by far the best-performing sector globally.

Although performance concerns have slowed investor interest in responsibly managed multi-assets, the majority of funds were subject to moderate inflows last year. There were also a number of new strategies launched during 2022, though this was somewhat muted in comparison to recent years and the asset class remains underserved relative to the wealth of options available to equity investors.

Take a look at the multi-asset funds Square Mile has selected for analysis in the latest ESG Clarity digital magazine.