Optimism over artificial intelligence powered the stock market in 2023. It also helped some sustainable funds turn in a surprisingly strong performance.
Based on data from Morningstar Direct, the top five sustainable U.S. equity mutual funds in Barron’s annual survey outperformed the
returning an average 35% against a gain of 26%, including dividends, for the index.
Sustainable U.S. equity funds overall were up an average 21.6%, including dividends, through Dec. 31, trailing the S&P 500’s total return by about five percentage points.
Our 2023 list ranks actively managed funds with at least $250 million in assets and more than a year of performance. We included only funds with an explicit mandate to invest according to sustainable or ESG principles.
So how did the top performers come out ahead? One theme that worked was emphasizing growth over value. Many ESG funds hold large slugs of high-growth tech stocks partly because the industry is perceived not to have a large impact on carbon emissions.
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Owning semiconductor maker
Nvidia
,
an ESG darling, supercharged returns with its eye-watering 239% gain in 2023.
Both tech and communications services were big winners in 2023, gaining 56.4% and 54.4%, respectively, according to S&P Dow Jones Indices. Energy—which had been the only sector with a gain in 2022, up 59.1%—fell 4.8% last year.
Funds that were underweight energy enjoyed a tailwind compared with 2022, when shunning energy stocks was a huge drag on performance.
The top-ranked fund,
Nuveen Winslow Large-Cap Growth ESG,
delivered a total return of 43.2%, trouncing the market. The fund holds many of last year’s winners in its top five:
Apple
,
Nvidia, and
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What makes the fund different from other ESG funds is that Winslow Capital Management, the subadvisor, “is exclusively focused on growth-stock investing,” says Justin Kelly, co-manager with Stephan Petersen. “We start the process by identifying the best-positioned long-term growth companies that will make successful investments, and then we take it to the next step, which is to do a deep assessment of the ESG attributes of these companies.”
The fund bulked up on Microsoft and Nvidia early in the year, which boosted overall returns. Microsoft was up 57% on the coattails of the AI boom. Savvy stock-picking also paid off: The fund bought shares of
in early February at $38, and they finished the year above $60.
Brown Advisory Sustainable Growth
also fared very well, up 38.9%. The fund has a concentrated portfolio of 33 stocks. “The only way to beat the benchmark is to be different,” says Karina Funk, who co-manages the fund with David Powell. She looks for companies that meet three key criteria: strong fundamentals, attractive valuation, and a sustainable business advantage. Like its growth-oriented peers, winners included Microsoft and Nvidia. Another stock that paid off was
Intuit
,
which was up 60% last year.
One of the biggest names in ESG—Parnassus Investments—also made it into the winner’s circle, at No. 3. Ian Sexsmith, portfolio manager of
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says ESG analysis is a risk-management tool that has added to performance. He looks for stocks that are increasing in relevancy, have competitive moats, are led by seasoned management teams, are trading at attractive valuations, and have positive ESG characteristics.
The fund was up 35.6% in 2023. One stock that drove outperformance was
a software provider for insurance companies. The fund sold its initial position in February 2022 but picked up shares later that year after the price fell. It was up 74% in 2023. Other winners include
Splunk
,
a cybersecurity and data-analytics company, and
the maker of exercise gear.
The
distributed in the U.S. by Amundi US, is in fourth place. Launched in 1928, it is the second-oldest mutual fund. “Our philosophy is to outperform the S&P 500 and our peers over the market cycle with a lower risk profile,” says lead manager Jeff Kripke. It was up 28.7% in 2023.
Kripke runs a focused strategy, with the top 10 positions accounting for at least 40% of the portfolio. “It’s rare to find great ideas at any given time, so when we find them, we like to concentrate in them,” he says.
One of his top investing themes is technology, with an emphasis on AI. He also sees opportunities in the green transition, including aggregates—granular materials such as sand and gravel used in construction. Nvidia was a big winner, along with sand and gravel supplier
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up about 50% in 2023. The fund is underweight healthcare, but its shares of
did well: The stock was up 40% last year.
Rounding out the leader board at No. 5, with total returns of 28.6%, is
managed by Katherine Collins and Stephanie Dobson. The investment premise for the fund is finding companies that are producing solutions to key sustainability challenges across a range of themes. It pulled ahead by having “a good, healthy mix” of companies across the tech, infrastructure, consumer, and industrials sectors, says Collins.
One stock that helped the fund outperform was
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a specialized distributor of water, wastewater, storm-drainage, and fire-protection products. The company went public in July 2021 at an offering price of $20 and, after an initial rise, got hammered in the selloff in 2022. Last year, it turned in a gain of more than 100%.
In some instances, at least, investors don’t have to sacrifice returns when investing in companies with strong ESG practices.
Write to Lauren Foster at lauren.foster@barrons.com