Morningstar: Majority of European sustainable funds outperformed their traditional peers

Morningstar: Majority of European sustainable funds outperformed their traditional peers

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Morningstar today published a report, How Does European Sustainable Funds' Performance Measure Up?, examining the performance of sustainable open-end and exchange-traded funds versus traditional peers in seven popular Morningstar Categories. This report spans nearly 4,900 funds domiciled in Europe, including 745 sustainable open-end and exchange-traded funds.

We examine the performance of sustainable funds in seven Morningstar Categories over the past one, three, five, and 10 years through December 2019, as well as during the COVID-19 crisis in the first quarter of 2020. The selected categories were determined based on the availability of sustainable funds with 10-year returns. The seven categories considered also happen to be the largest in terms of assets in and number of sustainable funds.

Key takeaways include:

  • Average returns and success rates for sustainable funds across seven Morningstar Categories suggest that there is no performance trade-off associated with sustainable funds. In fact, a majority of sustainable funds outperformed their traditional peers over multiple time horizons.
  • The odds of picking a winning sustainable fund over the past 10 years were greatest in the U.S. large-blend category. More than seven out of 10 live sustainable U.S. large-cap equity funds delivered higher returns than their average surviving conventional counterpart.
  • Over the 10 years through 2019, nearly 59% of surviving sustainable funds across the categories considered have beaten their average surviving traditional counterpart.
  • More sustainable funds have survived in the past 10 years, in relative terms. 72% of sustainable funds available to investors 10 years ago have survived, compared with less than half (45.9%) of traditional funds.
  • Sustainable funds held up better than their traditional counterparts during the COVID-19 sell-off, delivering superior returns in all but one category.
  • Fees are a crucial consideration when selecting a sustainable fund. Lower-cost options tend to have greater odds of success.

Hortense Bioy, Director of Sustainability Research, EMEA, APAC, comments: “The main takeaway of this study is that investing in sustainable funds doesn’t require taking a performance trade-off. This, however, doesn't mean that all ESG funds have equal odds of success nor that past outperformance will persist. Many factors come into play. And again here, fees play an essential role.”

This study is built upon the same methodology as the Morningstar Active/Passive Barometer. We compare average returns, success rates, and survivorship rates for sustainable funds versus traditional funds in each category.