Flight to Value Stocks Hits ESG Funds -- Journal Report
By Dieter Holger
Growth stocks propelled the outperformance of many
environmental, social and governance (ESG) funds in recent years.
But those same types of stocks now are turning into potential
headwinds for the funds, as investors pivot more to stocks the
market sees as undervalued.
ESG funds decide what companies to invest in based on more than
earnings and balance sheets. They look at things like
carbon-dioxide emissions and racial and gender diversity in the
High-growth companies that ESG funds have often skewed toward in
recent years include Apple Inc., Google parent Alphabet Inc. and
Microsoft Corp. The tech giants and other growth stocks flourished
last year despite a challenging economic environment. That
performance, in turn, helped ESG funds. A basket of 94 U.S. ESG
exchange-traded funds ended last year up more than 20% on average,
according to Dow Jones Market Data, beating the bellwether S&P
500's gain of more than 16%.
More recent months, however, have seen a shift in investor
appetites. In expectation of an economic recovery, investors have
piled into companies that are seen as undervalued relative to their
earnings potential. Meanwhile, there is less appetite for growth
companies. For the year, the Russell 1000 Value index is up nearly
12%, versus the Russell 1000 Growth's rise of 2.4%.
A similar trend can be seen in the performance of ESG funds. The
more than $850 million Nuveen ESG Large-Cap ValueETF (NULV) is up
more than 10% for the year. By comparison, Nuveen ESG Large-Cap
GrowthETF (NULG) is up 4.7% for the year.
ESG fund flows are following the pattern as well. As of
February, data from Morningstar Direct show that net assets in
growth-oriented U.S. ESG funds stood at $30.3 billion, versus
around $7.5 billion in value-oriented funds. But from December to
February, investors have favored value ESG funds over their
growth-oriented counterparts, with the value funds attracting 50%
more money in February than their growth-oriented rivals, says
Hortense Bioy, global director of sustainability research at
"These numbers mirror the value style rotation that we've seen
recently elsewhere in the market," she says.
Gautam Dhingra, chief executive of Chicago-based High Pointe
Capital Management LLC, says of ESG funds, "Clearly, they have
benefited from prior exposure to technology stocks."
But Mr. Dhingra is among those investors who think there are now
buying opportunities elsewhere. There's plenty of evidence, he
says, that value stocks are unfairly priced relative to growth
Value stocks recently favored by investors include energy
companies like Exxon Mobil Corp. and Chevron Corp. that could
profit from higher demand for oil and gas, and banks like JPMorgan
Chase & Co. and Bank of America Corp. that could benefit from
higher interest rates. That has hit ESG funds that tend to be
lighter on energy companies and banks.
ESG funds launched in recent years have chased the market's
overall trends, and that meant investing in tech, says Jordan
Waldrep, co-founder of Rosemont, Ill.-based TrueMark Investments
LLC. Mr. Waldrep points to how the S&P 500 of today is now also
heavy on tech, accounting for more than 26% of the index's weight.
His firm manages TrueShares ESG Active Opportunities ETF (ECOZ),
which he says adjusts holdings weekly and started trimming its
exposure to tech before the recent selloff.
"Funds are launched into the economy that they are dealing
with," he says.
Jordan Farris, head of ETFs at New York-based Nuveen, says his
company took a different approach than many other fund managers by
creating a value-oriented and growth-oriented option for ESG fund
investors. Nuveen wanted investors to have ESG options across value
and growth strategies, he says.
"When you're starting off and getting into developing ESG
products, the growth space is a natural area to go to," he says.
This year, Nuveen's value-oriented ESG ETF has drawn some $115
million as of the end of March and is one of the largest value ESG
"One of the reasons it is large is because there aren't that
many [value-strategy] options," he says. "I think more products
will come to market this year."
Mr. Holger is a Wall Street Journal reporter in Barcelona. Email
him at firstname.lastname@example.org Joseph Hoppe, a reporter for Dow Jones
Newswires in Barcelona, contributed to this article.
(END) Dow Jones Newswires
April 02, 2021 14:14 ET (18:14 GMT)
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