The Biggest ESG Funds Are Beating the Market

By Mathieu Benhamou, Emily Chasan and Saijel Kishan

January 29, 2020, 5:00 AM EST

Nine of the biggest ESG mutual funds in the U.S. outperformed the Standard & Poor’s 500 Index last year, and seven of them beat their market benchmarks over the past five years.

The $878 million Ave Maria Growth Fund was the top performer in 2019, followed by the $3.8 billion Calvert Equity Fund and the $4.9 billion Putnam Sustainable Leaders Fund. All three funds posted gains of more than 35%, compared with the S&P 500’s 31.5% with reinvested dividends. Morgan Stanley’s $3.9 billion Global Opportunity Portfolio and the $2.1 billion Brown Advisory Sustainable Growth Fund placed atop the rankings in the five-year period.

“The number one question I used to get from investors is aren’t you limiting your options and sacrificing returns by doing ESG?” said Karina Funk, a one-time civil and environmental engineer who runs the Brown Advisory fund. “I don’t get that question anymore.”

Read more: see our 2017 and 2018 rankings.

Bloomberg’s fourth-annual ranking of the largest environmental, social and governance funds with five-year track records, shows sustainable investing isn’t just for do-gooders. It’s a money-making opportunity that’s gaining popularity. Assets managed by the 75 retail funds in the survey climbed more than 34% to $101 billion last year as socially conscious money managers bet sustainable investing will help them find new growth opportunities.

“It turns out companies that generate strong business results by helping their customers with energy efficiency, solve some of our biggest sustainability challenges, and companies that are productivity leaders by reducing their resource consumption are performing well,” Funk said.

Morgan Stanley’s Global Opportunity Fund, led by Hong Kong-based portfolio manager Kristian Heugh, focuses on finding companies that use strong management to minimize negative impacts to the environment and society over time; it also incorporates sustainability analysis into every portfolio position. The Morgan Stanley fund’s biggest holdings, as of Sept. 30, were Mastercard Inc. and Amazon.com Inc. It also had a sizable investment in Chinese after-school tutoring company TAL Education Inc., which has climbed amid strong revenue projections in spite of accounting concerns raised by short sellers in 2018.

The top-performing funds also bet heavily on technology and finance services companies, which have historically been low-emission sectors. Tech companies, including Microsoft Corp., Apple Inc. and Alphabet Inc., were staples of many of the top-performing ESG funds, as were credit-card companies Visa Inc. and Mastercard. Health-care companies Danaher Corp. and Thermo Fisher Scientific Inc. were other standouts, even though healthcare was one of the worst performing sectors in the Russell 1000 Growth Index during much of last year.

Brown Advisory’s Sustainable Growth Fund has a big position in Danaher, which was rewarded by the market last year for tax benefits associated with its acquisition of General Electric Co.’s bio-pharmaceutical business. Danaher also has a division that focuses on water safety and purification that makes it attractive from an ESG perspective, Funk said. She said she bet on Thermo Fisher because its pollution analysis and food-safety testing equipment are solving sustainability problems, and she likes semiconductor companies focused on energy efficiency, including Monolithic Power Systems and Marvel Technologies, as well as sustainable-packaging plays such as aluminum-maker Ball Corp.

“Clean water is one of the opportunities we see going forward,” said Joe Hudepohl, a former U.S. Olympic swimmer who manages the Calvert Equity Fund, explaining how the fund also came to bet on Danaher last year.

Additionally, Calvert invested in credit-card companies because they can reduce inequality by promoting access to financing for people around the world. Looking to 2020, Hudepohl said he’s weighing what stocks he might buy if there’s a market correction.

“We’ve had two pretty good years of performance, but I believe we’re in the late innings of an economic expansion,” Hudepohl said. “Quality tends to do well late cycle and into a downturn, so we think we’re pretty well positioned to protect in a down market.”

ESG managers outperform when they focus not just on “box-checking,” but finding long-term competitive advantages, said Katherine Collins, who co-runs the Putnam Sustainable Leaders fund with Stephanie Dobson. The fund was previously called the Putnam Multi-Cap Growth Fund before it transformed into an ESG fund in March 2018.

Collins, who is a beekeeper in her spare time, had also bet on Danaher, saying she liked how the company tracks recruitment, mentoring and training for employees. She said another top trade was Chipotle Mexican Grill Inc. helped by its commitment to antibiotic-free meat.

Bloomberg’s ranking focuses on funds with at least $100 million in assets that use ESG in their investment process. Since most portfolio managers regard sustainable investing as a long-term bet, the top funds are selected based on their performance weighted equally over one, three and five years.

ESG Funds With the Highest Score in 2019

Rank#	Name	Manager(s)	Score	Benchmark Index	Focus	Assets $M	1-year total return (%)	3-year total return (%)	5-year total return (%)
1	Morgan Stanley Institutional Fund - Global Opportunity Portfolio (MGGPX)	Kristian Heugh	98.1	MSCI All Country World	ESG	3,846	+35.03	+23.66	+17.60
2	Brown Advisory Sustainable Growth Fund (BIAWX)	Karina Funk and David Powell	93.2	Russell 1000 Growth	Environmentally Friendly	2,086	+34.88	+21.66	+16.49
3	Morgan Stanley Institutional Fund - International Opportunity Portfolio (MIOPX)	Kristian Heugh	90.1	MSCI All Country World Ex-U.S.	ESG	1,761	+34.79	+21.79	+14.70
4	Calvert Equity Fund (CSIEX)	Joseph B. Hudepohl, Lance V. Garrison, Jeffrey A. Miller and Robert R. Walton Jr.	90.0	Russell 1000 Growth	ESG	3,766	+36.50	+21.70	+13.85
5	Ave Maria Growth Fund (AVEGX)	Adam P. Gaglio and Chadd M. Garcia	86.8	S&P 500	Religiously Responsible	878	+37.09	+19.67	+13.32
6	Putnam Sustainable Leaders Fund* (PNOPX)	Katherine Collins and Stephanie Dobson	86.2	Russell 3000 Growth	ESG	4,941	+35.84	+20.20	+13.24
7	Amana Growth Fund (AMAGX)	Nicholas Kaiser, Scott Klimo and Monem Salam	84.8	S&P 500	ESG and Islamic	2,269	+33.07	+20.68	+13.50
8	Morgan Stanley Institutional Fund - International Advantage Portfolio (MFAPX)	Kristian Heugh	84.2	MSCI All Country World Ex-U.S.	ESG	2,397	+29.72	+20.89	+14.68
9	AllianzGI Focused Growth Fund (PGWAX)	Karen B. Hiatt and Raphael L. Edelman	81.6	Russell 1000 Growth	ESG	1,040	+33.85	+18.37	+13.12
10	Iman Fund (IMANX)	Dr. Bassam Osman	81.5	Dow Jones United States Islamic Market	Islamic and Religiously Responsible	137	+34.68	+17.52	+13.27

Note: The score takes into consideration one-year, three-year and five-year annualized returns, weighted equally. Scores range from zero to 100.
*The Putnam Sustainable Leaders fund was previously called the Putnam Multi-Cap Growth Fund and converted to an ESG strategy in March 2018.

Design & development: Christopher Cannon and Cedric Sam

Editors: Tim Quinson and Alan Mirabella

Methodology: Rankings include open-end U.S.-based funds that incorporate ESG, Socially Responsible, Religiously Responsible, Islamic, Environmentally Friendly, Clean Energy, or Climate Change into their investment strategies as noted in the fund prospectus, have total assets of at least $100 million, an equity allocation greater than 80%, and a five-year history. Assets are as of Jan. 27, 2020. Returns are through Dec. 31, 2019. Retail funds were used, either primary or class A shares. The top 10 of the 75 funds in the survey are shown. In the graphic, fund performance is compared with the S&P 500, which not all funds use as a benchmark.