Sustainable funds rebounded strongly in the second quarter of 2020 after the Covid-19 market sell-off, global financial services firm Morningstar reports. Supported by the stock market recovery and growing investor interest in environmental, social and governance issues, global inflows into sustainable funds jumped 72% to US$71.1 billion during the period.
But while global inflows surged, with Europe accounting for 86% and the United States 14.6%, Asia Pacific only accounted for 2.4%, according to the report by Morningstar Manager Research. The region reported net outflows of US$774 million for the three months to June.
Asia ex-Japan saw net outflows of US$894 million, almost cancelling out the record US$905 million inflows in the first quarter. The huge outflow in the region was mainly driven by China, which registered a US$1 billion outflow. The report attributes the outflow to a well-known practice in the country called "churning". It is common for Chinese investors to treat equity fund launches like initial public offerings of stocks. They buy them, hold them for a few days or weeks, and sell them as soon as the funds have generated a certain return.
Hong Kong and Singapore represent a fraction of the sustainable fund universe, with only US$283 million and US$6 million domiciled in the two hubs, respectively. However, Morningstar notes a growing investor interest in ESG in the two markets, with investors usually buying European UCITS funds. Such investors buy not only share classes denominated in Hong Kong and Singapore dollars but also those in US dollar and euro. As such, it is “a challenge to determine how much money in sustainable funds is held by investors in these two markets”, Morningstar says.
Taiwan bucked the regional trend and registered the largest inflow for the second straight quarter. It attracted almost US$130 million, boosted by the launch of SinoPac Taiwan ESG Plus Fund-I, which raised US$62 million in April. The fund is expected to invest at least 70% of its net assets in constituent stocks of the FTSE4Good TIP Taiwan ESG Index.
In Thailand, the two fund launches were Super Savings Fund Extra vehicles, which allow investors to enjoy additional tax-deduction benefits provided that investments were made in the second quarter of 2020. Besides promoting long-term individual savings, the government initiative intends to support the local stock market, given that Super Savings Fund Extra vehicles must have at least 65% of assets invested in Thai equities. The initial US$3 million assets raised by the two funds at their launches in April had quickly grown to US$18 million in June, the report says.
The Japanese sustainable fund market, meanwhile, recorded outflows of US$28 million in the second quarter. Although fund launches tend to drive inflows, this was not the case during the period because of the Covid-19 outbreak, the report says.
In Australia and New Zealand, sustainable funds universe attracted inflows of US$ 148 million, split roughly evenly between active (US$70 million) and passive (US$78 million) strategies. Fund houses Australian Ethical and Dimensional accounted for the majority of inflows during the quarter.
Globally, assets in sustainable funds hit a record high of US$1.06 trillion as of the end of June, up 23% from the previous quarter. Product development was strong, with 125 new offerings, as asset managers continued to rebrand conventional products into sustainable funds, the report says.