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Flight to Value Stocks Hits ESG Funds -- Journal Report

02/04/2021 7:29pm

Dow Jones News

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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 workforce.

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 Morningstar Inc.

"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 stocks.

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 funds available.

"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 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)

Copyright (c) 2021 Dow Jones & Company, Inc.

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