Sustainable fund performance suffers amid high energy prices

With energy stocks surging this year, Canadian sustainable funds are having a hard time keeping up with the market.

More than three in four (76%) sustainable equity mutual funds and ETFs in Canada underperformed the average fund in their category over the first six months of 2022, a report from Morningstar said.

Roughly the same proportion of sustainable allocation funds (78%) underperformed their peer group, and the same was true for about half of sustainable fixed income funds (53%).

“This could be attributed to the underweight in oil and gas companies, which outperformed the market for the year to date,” the report said. “In Canada, very few sustainable products invest in the oil and gas sector.”

The lagging performance marks a change from 2021, when 57% of sustainable investment products in Canada outperformed their category peers over the full year, Morningstar said.

Flows into Canadian sustainable funds slowed in the second quarter to US$1.5 billion (all figures in U.S. dollars). Active strategies led the way while passive funds saw outflows of $3.8 million. Almost all the inflows (88%) went to equity funds.

Assets in Canadian sustainable funds declined 8% quarter over quarter to $24.4 billion at the end of June, compared to a 13.4% drop for the overall market.

Product launches also slowed in the second quarter, Morningstar said. Fourteen new sustainable funds entered the Canadian market in Q2, compared to 28 launches in the first quarter and 31 in the same period last year.

Globally, sustainable funds attracted $32.6 billion in Q2, a 62% drop from the first quarter, Morningstar said.

“Amid investor concerns over a global recession, inflationary pressures, rising interest rates, and the conflict in Ukraine, sustainable funds still held up better than the broader market, which experienced $280 billion of net outflows over the period,” the report said.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.