Last year was a testing time for global equity funds. Against the backdrop of geopolitical uncertainty driven in part by the ongoing Russian full-scale invasion of Ukraine and the situation in Gaza, global markets have been affected by both political and economic uncertainty. In addition to geopolitical factors, global equity fund managers have also had to battle against lower-cost passive funds in an environment that has provided strong tailwinds for large-cap indices.
The buoyancy of the ‘magnificent seven’, which contributed to around 20% of the MSCI World index performance at the end of the calendar year, has driven this. Additionally, high inflation and subsequent high global interest rates have also contributed to this challenging market over the past 12 months, with growth-oriented companies facing difficulties in purchasing materials and expanding their operations in line with investor expectations.
See also: Stress relief: Finding investment opportunities to prevent water scarcity
Nevertheless, there is light at the end of the tunnel for a specific subsection of the market. As reported in Morgan Stanley’s Sustainable Reality report, produced by its Institute for Sustainable Investing, sustainable funds have outperformed their traditional competitors within every asset class over 2023. In fact, for equities, sustainable funds achieved a median performance of 16.7% over 2023, whereas traditional equities achieved a median performance of 14.4% over the same period.
Delving further, we can see the funds with the highest level of social and environmental impact have struggled to match the rest of the sustainable market’s performance. This is due in part to their tendency to be exposed to a higher level of mid- and small-cap growth-oriented companies that have underperformed when compared with larger companies. Yet, while relative outperformance is still a critical objective of many global equity impact funds, we argue that investors in these strategies are, in general, stipulating the manager generates positive environmental and/or social impact as a primary objective.
See also: Testing the water: Engagement is evolving
In the following three examples, we have chosen three global equity funds from the Square Mile’s Academy of Funds that have significant exposure to water. These funds should not only offer the potential for good financial performance but, more importantly, generate material positive impact.
Go to PA Future’s June 2024 digital magazine to read Louis Selby’s three recommendations
