Q4 2021 Equity Manager Report: ESG Funds Swell To 10% Of Global Fund Assets At Year-End

Was 2021 the year environment, social, and governance (ESG) issues leaped to the forefront for investors?

The numbers sure say so.Q4 2021 Equity Manager Report: ESG Funds Swell To 10% Of Global Fund Assets At Year-End Q4 2021 Equity Manager Report: ESG Funds Swell To 10% Of Global Fund Assets At Year-End

Over $649 billion flowed into ESG-focused funds the last year¹ as investors increasingly pushed conversations about climate change and social justice with companies and regulators alike. By the end of 2021, the massive influx of capital led to ESG funds comprising roughly 10% of worldwide fund assets. Unsurprisingly, the year was marked by several significant movements on the ESG front amid a rise in shareholder engagement and an increasing call-to-action by governments worldwide to combat the intensifying climate crisis.

2021 also wrapped up on a volatile note for markets, with the emergence of the omicron variant of COVID-19 and ongoing uncertainty over inflation, rate hikes, and the growth slowdown in China dominating the headlines. However, these fears masked what turned out to be a strong, positive quarter for most equity regions outside of emerging markets.

The fourth quarter was also a more favorable environment for global ex-U.S., U.S. small-cap, Canada, emerging markets, and Australia equity managers, while proving more challenging for U.S. large-cap, Europe, UK, Japan, and long/short equity managers. Low volatility and quality were the best-performing factors of the quarter, while the growth factor underperformed in most regions and the value factor saw mixed results. Importantly, the style was less of a driver of performance throughout the quarter, with stock selection being of greater importance.

Information technology, utilities, and materials were the clear winners across most regions. Meanwhile, higher growth/valuation sectors such as communication services, health care, and consumer discretionary - which have largely been beneficiaries during the pandemic - lagged in performance due to profit-taking and ongoing concerns around inflation and the extent of potential rate hikes.

Our fourth-quarter survey reveals that while managers remain generally optimistic about the economy, they are increasingly more discerning on the breadth of the recovery. This is leading to a preference for stronger balance-sheet businesses with pricing power, given the stickiness of inflation. Managers also note that year-over-year earnings improvement will potentially be more challenging in 2022 relative to 2021, given the base effects.

Drawing on our distinctive relationship with underlying managers, we've compiled these and other insights from specialists across the manager universe into an easy-to-read report. Listed below are the chief tactical observations from key equity and geographic regions around the globe during the fourth quarter of 2021. We've also added a special section on ESG investing at the top that shares the key trends our manager research team foresees in the year ahead.

ESG trends for 2022

Q4 2021 Equity Manager Report: ESG Funds Swell To 10% Of Global Fund Assets At Year-End

Emphasis on Scope 3 emissions disclosure

Private capital focus for green deals

  • Larry Fink is championing private company disclosure of environmental data.
  • Green bonds

    Carbon markets

    Sustainability accountability

    Emphasis on the S in ESG

    Australian equities

    Change in capex mix supports inflation being transitory

    Offset greenwashing

    Canadian equities

    Investment opportunities down the market cap spectrum

    Favorable environment for banks

    Expected year-over-year dividend growth

    COVID-19 + inflation + interest rates = volatility

    Emerging markets equities

    Clouds lifting for a China recovery

    Steering around political headlights

    Bottom-fishing out at sea

    Actively covering for inflation expectations

    Europe and UK equities

    Value opportunities are diversifying

    Europe: Earnings-per-share (EPS) expectations for 2022-23 remain depressed

    Europe: Inflation is here to stay

    UK: Cyclical value

    UK: Environmental thematic

    Global equities

    Managers greet the new year with more caution

    Inflation prompts the Federal Reserve to use its brakes

    Style trends are muted, security selection carries the quarter

    Climate and energy trends create a complex opportunity set

    Japan equities

    Focus on Fed's tightening policy

    Mixed view on the sustainability of inflationary pressures

    Reopening theme postponed but still in motion

    Currency headwinds and inflation

    Long/short equity

    Significant deleveraging event causes a wait-and-see approach

    Continued lag in long alpha, particularly in crowded names

    Custom short baskets

    Reduction from unprofitable/expensive tech

    Real assets equities

    Increased real estate M&A activity in 2021

    Real estate trends

    Infrastructure lagging economic recovery offers opportunities

    U.S. large-cap equities

    Optimism for reopening-related industries

    Inflation and ability to pass price

    Favorable outlook for banks

    Software and internet stocks face difficult comparisons

    U.S. small-cap equities

    Muted outlook for small caps, positive outlook for active management

    Positioning in energy and banks is consistent across all styles

    Inflation and small caps

    Value managers become more discerning within cyclicals

    Growth managers acknowledge stretched valuations in technology but aren't completely abandoning the sector

    The bottom line

    While managers are largely sanguine on the economic growth prospects for 2022, persistent inflation and rising rates mean that superior, risk-adjusted returns will likely be harder to achieve than in the past few years. Amid such an environment, we believe the views of specialist managers will be critical to identifying new opportunities and exploiting market inefficiencies. We look forward to continuing to share these insights with you as the new year unfolds.

    ¹ Source: Refinitiv Lipper

    ² Data from Morgan Stanley Prime Brokerage


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