Inverse ESG funds saw assets under management soar by about 800 per cent over the six months to the end of March this year, according to a new Morningstar report, albeit from a low base and distorted by a US$1 billion reverse road-to-Damascus moment.
Authored by Morningstar sustainability researchers, Alyssa Stankiewicz and Mahi Roy, the study found a tightly defined anti-ESG universe of 26 products – all, bar one, US-listed exchange-traded funds (ETFs) – grew from under US$250 million during the September last year to exceed US$2 billion as at March 31 this year.
However, the rebel sector more than doubled over the third quarter of 2022 as a former believer, Inspire Investing, dumped the ESG labels on its range of ‘biblically responsible’ ETFs with chief executive, Robert Netzly, condemning the “escalation of leftist intolerance and rancor” in the space.
“Inspire’s funds followed ESG mandates until the CEO renounced ESG investing in August 2022,” the Morningstar report says. “Consequently, these funds joined the anti-ESG cohort in September 2022, boosting assets in this category by more than USD 1 billion in conversions.”
But anti-ESG funds also reported a genuine uptick in investor interest with a record US$376 million of flows in the September 2022 quarter – or more than five-times the previous high point in the first three months of 2021.
Again, a single provider, the start-up passive player, Strive, skewed the result.
“More than 80% of that was collected by Strive’s first fund—Strive U.S. Energy ETF—which attracted nearly USD 100 million in its first week and more than USD 300 million in its first month,” the Morningstar report says.
“… However, Strive’s marketing may have had knock-on effects for other anti-ESG funds: Renouncers and Political funds attracted USD 71 million and USD 49 million, respectively, over the past three quarters combined.”
Flows into anti-ESG funds have since eased but remain well above historical levels.
Morningstar splits the investment infidels into five camps dubbed: anti-ESG; renouncers, political; voters; and, vice.
The single ‘pure’ anti-ESG fund as per the Morningstar categories – the Capital Constrained ESG Orphans ETF – closed this month.
Overall, though, the broadly defined anti-ESG funds “deliver on some expectations but surprise on others”.
“They tend to have higher levels of ESG risk than peers, but some also have strong exposure to positive environmental impact,” the study says.
Most of the 26 funds in the Morningstar-defined sector outperformed respective benchmarks since inception – although the majority had just two-quarters of return history.
“Each of the eight anti-ESG funds with a track record greater than one year beat the Morningstar US Market Index in 2022, even though just one of those—USA Mutuals Vice—posted positive returns for the year,” the report says.
“… any conclusions drawn through performance analysis should not be mistaken for indicative of broader trends.”
Nonetheless, investors in the B.A.D, Unusual Whales Subversive Republican Trading and, of course, God Bless America ETFs will no doubt keep on believin.