Wouldn’t it be great if all evil was eliminated and only the good-natured, socially caring businesses remained for investments? At least this is the “mission” of funds and ETFs that focus their investments on ESG-compliant equities. The stocks of the “bad” companies aren’t bought anymore or even get sold, while the “good” entities form the bedrock of these investment vehicles. But how does it look under the hood? What stocks are held by these funds and how did they perform? And: What’s happening on the “dark” side?
Summary and key takeaways from today’s Weekly
– Today’s Weekly shows you what is really behind ESG funds. They are Big Tech or Blue Chip funds without any clear differentiation that would qualify them as “clean”.
– The performance of the ten biggest such funds has been below even the S&P 500 this year.
– Allegedly, investors are willing to sacrifice “some performance” for the better (and for higher fees). What they got was more and riskier concentration in higher valued stocks. The winners, however, were taken out.
– On the other hand, we have a growing anti-ESG trend. However, this is not convincing, either, but shows that we are by no means steering just in one direction.
– don’t fall for any labels.
Due to some readers asking me for a short summary at the beginning of a Weekly, I decided to implement this info box. Feedback is appreciated the same as other suggestions.
Meanwhile, most professional as well as retail investors should at the very least have heard the abbreviation ESG – Environmental Social Governance.
Most often, these words are associated with “climate-friendly”, socially responsible and caring as well as plastic- and fossil-energy-free businesses that maybe spend some money on local projects like schools or clean water supplies. And of course, these companies are honest in their reporting and scandal-free.
This is the ideal picture.
However, those not drunk with idealism or ideologies, know that nothing is ideal or perfect in reality. Not only because of the impossibility of containing only the pretend best of all components. Also, there is always room for subjectivity, i.e. what is perceived as good by one, has not necessarily to be favored by someone else.
Because more and more retail investors are investing in such funds to calm their conscience and active fund managers get pressured out of the dirty into the clean equities, surely they all have performed well, while the purposefully neglected dirty and sin stocks are out of favor and lagging, right?
Better think twice and bury this hope!
Not only have the by volume biggest of these ETFs performed badly and even worse than the S&P500 on a year-to-date basis. Do you remember that broader stock indexes have one of the worst years since the Financial Crisis of 2008/2009? If the performance of the S&P500 YTD has already hurt many investors, what have those that performed even worse done then?
But that’s not all.
It might surprise you that these theme-investing funds hold primarily the Big Tech companies and other hugely capitalized stocks. This brings them very close to the broad S&P500 index – but without those stocks that performed best this year.
What does it mean for the future?
And what about the rising trend of anti-ESG funds?
We’ll explore all of these in this most recent weekly issue which forwards us to my next research report that fits perfectly into this confusing mess: a hated, neglected, proven business model, with strong financials, undervalued and offering a fat double digit dividend yield (>20%) that is by no means in danger of being cut. That’s the madness of ESG investing.
On Friday, 23 December 2022, I will send out this latest research report (and last one for 2022) to my Premium Members.
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What is ESG and what are the goals?
In order not to describe in other words what somebody else has already done to the point, here is a quote with a definition of ESG from investopedia:
Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.Investopedia (see here)
Hence, ESG investing describes a capital allocation approach that is taking into account certain required standards of a company’s behavior. Using predefined criteria allows “socially conscious” investors to separate the wheat from the chaff.
Or the dirt from the beautiful and clean.
Or in other words, to filter out those companies that do not fulfill these requirements and thus do not qualify as social enough. Those individual criteria as well as their weightings and implications for an investment decision can vary to certain degrees, while others often repeat.
This has been a rising trend over the past years.
Not only among some groups of fanatic retail investors, but also among entities with public duties like pension funds. More and more passively managed ETFs only buy stocks that fit into this prerequisite. Actively managed funds get pressured to present ESG compatible investing strategies (I speak from experience) or the funds won’t be recommended anymore or harder to find for investors.
The above was from an investor’s perspective. From a corporate’s perspective it is dealing properly with perceived risks using a risk management approach to handle the critical points in the best possible manner.
What are the pros and cons for this approach?
On the pro side, it is often mentioned that not only do you stop supporting the perceived evil, you can also increase your chances not to pick such ugly businesses like
- BP (ISIN: GB0007980591, Ticker: BP) – Gulf of Mexico incident
- Wells Fargo (ISIN: US9497461015, Ticker: WFC) – opening of banking accounts without permission or
- Volkswagen (ISIN: DE0007664005, Ticker: VOW) – Diesel scandal
On the con side, you find arguments like you sacrifice some returns for the better.
Also, by skipping industries like tobacco, you leave recession-resistant investment opportunities aside which could lead to higher volatility or overall portfolio drawdowns. Plus, the pretend clean businesses will most often trade at higher multiples, thus giving you as an investor lower expected returns.
That are points Investopedia makes.
Here are my personal comments on it:
Just by publishing more reports with more pages that the majority of people (even in the professional world) will never read anyhow due to information overload, will not prevent anything. It sounds nice and beautiful pictures try to portray certain messages.
But, for example how shall an oil company know in advance that a pipeline leck is coming? Do you think that Wells Fargo and Volkswagen would have written in advance about their practices and wrongdoings?
Would you have really been able to circumvent these misinvestments?
Don’t you think that every company will create such wonderful reports and portray themselves from the best possible perspective? Will any company – even the truly ugly – write about themselves that they are the bad guys?
Also, what is achieved in the first place is the crippling of a company’s innovation power and distracting from the focus on value adding processes. By creating jobs that first and foremost only heat chairs and turn around papers all day, you do create false incentives.
Not that I am in favor of the bad and against the good.
But, this is the task of governments to lay out proper frameworks with useful and clear laws, not to outsource this to companies with a wide scope for interpretation!
Next, by buying shares on the open market, you are not giving any company any money directly! You would only do so, if you invested during a public offering, in case of an equity raise or before, when the company was still private.
As a shareholder you can still raise your voice and vote at annual general meetings.
As to the con side, from an investor’s perspective, it is outright stupid and irrational to buy overvalued, sometimes even unprofitable companies that do not cover your return requirements. Also, no serious investor would take on higher drawdowns voluntarily.
Not only that, these “investments” can significantly increase your own risk profile.
I am not writing this from the perspective of a greedy investor who is not satisfied with a 5% return, instead of 8% or 10%. Think of institutions that have the duty to manage money conservatively for the retirement of other people. When they are forced to put money into lousy investments that do not meet certain return thresholds, but only are beautifully advertised without having substance, the disaster is predefined.
Will they then tell the people who lost money “oh, but we invested socially”?
If you don’t believe me, just ask public employees in California. Their pension system CalPERS (and the biggest such entity in the whole US) went on this tree and favored ESG investments:
It should be obvious what happened next.
Here are some further screenshots without further comments from my side:
In a free market, they should face their own fate and not be bailed out with taxpayer’s money. That’s a free lunch for mismanagement.
You can still filter out the most “dirty” sectors or stocks for yourself. For example, you won’t see me writing positively about “defense” companies. I will also not invest in such stocks.
Investing in unprofitable businesses or such that even with massive subsides barely earn any money (think of wind energy), is certainly not the right way to go.
This is only a recipe for a disaster.
How many of the “good” and seemingly socially infallible stocks have performed really badly, because expectations were set wrongly or were just too high?
In my article “Are evil energy (oil) stocks already priced too ambitiously for a recession?” (see here), I already briefly touched on this topic regarding the market leader of wind energy Vestas Wind Systems (ISIN: DK0061539921, Ticker: VWS) as well as the reverse vending champion Tomra Systems (ISIN: NO0012470089, Ticker: TOM).
From a rational and fundamental perspective, both are not investable, from a sane and common sense perspective. Tomra, even after its 50% drop, is still valued, as if the business would be 2x–3x bigger from a fundamental perspective. Where shall the upside come from? What if it disappoints?
Risk management, anyone?
However, the expectations are for this trend to continue.
Such ESG-specific funds (actively and passively managed) have already reached a size of 400 billion in assets under management (AUM) during 2021. This was a rise of 33% just from one year prior. Due to the currently declining markets, I would assume that this order of magnitude hasn’t changed a lot.
To play these trends, the easiest way seems to be buying funds that cover this trend – if one really wants to.
With this, let’s have a look at the biggest ESG funds.
Big ESG funds – Big mess?
Sector-wise, it is maybe easier to understand what companies qualify for ESG, if you start with the “anti-ESG” companies that are hated and do not fit into this profile:
Oil, gas, coal, defense and of course tobacco and maybe alcohol!
Turning it around, it would be straightforward to think of companies in the so-called renewable energy space (wind, solar, hydrogen, geothermal energy, etc.), recycling, waste management, plant-based food producers or anything from the sharing-economy.
I am looking at the biggest ETFs / funds here, because most retail motto-investors don’t spend any time on checking beforehand what they are buying.
They in most cases buy by
- provider (usually one of the big names like BlackRock or Vanguard)
- yearly costs
- recommendation from someone else
All these factors often are connected to the size of such a fund.
I have already written months ago a whole article about the risks of investing blindly in ETFs, please see here, if you haven’t done so.
Here is an overview of the biggest ESG ETFs, including their performance year-to-date (until 5 December 2022) and in comparison to the S&P500:
The performance numbers are slightly more than two weeks old, but now they likely are even worse in most cases after the markets went down again.
Do you see the message just one line below the headline?
The key thing to take home after a quick look is the partly even massive underperformance of these ESG funds compared to the S&P500 index.
The funny thing is (or sad, depending on who’s reading this) that these ESG funds are supposed to minimize risks. All the biggest funds that were not only supposed to minimize risks, but also to diversify their investments and obviously invest preferably in defensive (not defense!) businesses, achieved a double digit loss for their investors.
This is not risk management as I understand it.
As we will see soon, because they basically replicate the S&P500 index, but without including the winners.
And the winners are – mostly the perceived dirty businesses!
Let’s have a closer look a four hand-picked funds from the list above:
- the Brown Adv Sus Growth (BAFWX, see here) with –28.1%
- the Vanguard ESG U.S. Stock ETF (ESGV, see here) with –20.6%
- the iShares ESG Aware MSCI USA ETF (ESGU, see here) with –16.9%
- the TIAA-CREF Core Im Bond (TSBIX, see here) with –13.0%
The first fund from the list with the worst performance (see factsheet here), the Brown Adv Sus Growth, has 5.4 bn. USD in assets under management.
Note, that the following information is all from the factsheet that is per 30 September 2022, only.
By then, the fund had 34 positions in total, which for me personally is too much, but for a big fund it is astonishingly little.
Here is an overview of their holdings by sectors and by individual stocks:
Just from a birds-eye view, without too much philosophy:
There are no consumer staples, utilities and energy stocks in the fund – yes, you guessed it. These were the three best performing and least losing sectors YTD.
The energy sector gained 31.8% YTD, while utilities more or less could break even with just –0.6%. Consumer staples still did very well with only –5.6% compared with a loss of 20% of the S&P500 index.
All three sectors have in common that they pay relatively attractive and reliable dividends, by the way.
The fund has put its money to the most part into tech stocks with nearly 40% overall weighting and –26.9% in “performance”. Then you have healthcare with 23.5% (and a modest –8.3%, also consider the dividends) and consumer discretionary (where also some tech stocks are hidden) with –32.8% this year.
Their top 10 consists of the biggest companies by market capitalization and mostly tech stocks. However, for example I miss Apple (ISIN: US0378331005, Ticker: AAPL) among them. But most of the holdings are the big blue chip companies.
To conclude here, this fund is mainly a Big Tech (with the exception of Apple) or at the very least Blue Chip investment vehicle. It misses the best performing sectors totally. And, at first sight, I don’t see what makes it so much ESG-friendly, except that it has no energy investments.
unreliable renewable energy also energy? I don’t know…
The second fund, with a slightly “better” performance, the Vanguard ESG U.S. Stock ETF, has 6 bn. USD in AuM and the following data is per 30 November 2022. You can find the most recent information here.
With nearly the same size as the first fund, this one has invested into 1,487 individual positions. Interestingly, they also publish the median market cap of their holdings which is 134 bn. USD – i.e. again, we are dealing with big fish.
Here is first an overview of their holdings by sectors:
The results are the same, however with differences only in the details and thus a slightly better performance:
- the fund’s biggest investments by sector are – again – technology with 28.9%
- health care plays also an important role with 16% of total investments
- with 15.8% they also have a large chunk invested in consumer discretionary
- regarding the winners, this fund has a slightly higher exposure to consumer staples, but barely any utilities or energy
And here you have the biggest equity holdings:
There are some different positions compared with the first fund, e.g. Apple is here the single biggest position.
But all in all, this is again a fund that is heavily weighted towards Big Tech and Blue Chips. Again, I don’t see what makes it so much ESG-friendly, except that it has no energy investments.
Fund number three, the iShares ESG Aware MSCI USA ETF (ESGU, information here) has so far a performance of –16.9% as per 5 December 2022. The fund has nearly 20 bn. USD in AuM, i.e. it is about double as big by volume as the previous two combined, i.e. this is THE ESG ETF.
We can make it short here, the overall results are the same, with just slightly minor differences:
First, the investment per sector:
Surprise, surprise (or not) – tech, health care and consumer discretionary are again among the biggest sectors. However, here we have a higher exposure to financials.
Energy has a weighting of 5.1% which is much more than the other two funds had, but in total rather neglectable. Utilities are also very lowly weighted.
It will not shock you to see similar names in the top ten like above:
Here, I would even say, it is difficult for me to see any difference at all with the exception that Procter & Gamble (ISIN: US7427181091, Ticker: PG) is swapped for Coca-Cola (SIN: US1912161007, KO) – but it doesn’t matter.
Again, a Big Tech and Blue Chip fund.
The fourth and last fund, the TIAA-CREF Core Im Bond, is the only one investing in bonds. You can find all the necessary information as to the TSBIX here.
It has 5.8 bn. USD in AuM and is the only one from our selection that has beaten the S&P500 so far this year. As to most recent numbers, the S&P500 is down by about 20%, while this fund has “only” –12.5% on the clock.
We can see on the first chart that the fund invests mainly in US fixed income with 79.1% of its holdings. The rest is international bonds. Equities are quasi non-existent.
If we dig a little deeper, we see the following breakdown of investments:
28.6% were held in corporate bonds, 17.7% in US government bonds. These are the two most prominent sub-categories.
Finally, as to the individual positions, I could find the following breakdown:
It is a wide-spread portfolio with a completely different approach. The single biggest positions are US government bonds.
But here again the question: What is so special ESG here?
And: Among the top positions a bonds with long maturities! This means, they have suffered fat accounting losses so far this year, due to the dramatically higher interest rates! I would not touch this fund under any circumstances.
Nothing in these ETF funds has answered my questions or even shown me a clearly positive differentiation.
Interesting piece: According to the National Bureau of Economic Research (NBER, see here), a conducted poll resulted in, quote:
[…] We quantify the value that shareholders place on ESG using a revealed preference approach, where shareholders pay higher fees for ESG-oriented index funds in exchange for their financial and non-financial benefits. We find that investors are willing, on average, to pay 20 basis points more per annum for an investment in a fund with an ESG mandate as compared to an otherwise identical mutual fund without an ESG mandate, […].National Bureau of Economic Research (NBER, see here)
Paying more for the same, except for another label.
Don’t they also always like to say that costs are a big component of total returns, especially the longer the time horizon?
The last point I want to make in this section is that the definition or qualification as an ESG investment can change, as it wants. What do you think about this one (I already showed this screenshot in another article form me):
One hundred years ago, tobacco was used for medicinal purposes. Even in the 1950, there were doctors advocating smoking. Would this be an ESG investment today?
For me, until here, this is deception by labelling. I don’t see any reasons for such funds to even exist, when they anyway nearly replicate the S&P500.
Then, better invest in a basket of 15–20 individual stocks (in this case the Blue Chips) and save the costs.
When everything is going in one direction…
There are chances where no one dares to look!
The rise of anti-ESG funds
Before we come the the extrem countertrend of ESG-investing, here is a notice from a Bloomberg reporter that should not be put under the carpet:
Why are some proclaimed ESG-funds buying “quietly” oil stocks?
For return purposes? To level up their underperformance through investments in established and financially strong companies with reliable dividends?
No, they say they want to secure voting rights in order to put pressure on the boards of the “dirty” companies and this way enforce changes. Or as they describe it “to encourage […] to boost their sustainability performance”.
Ah okay. Who ever believes this.
But now, let’s have a look at the rising trend of anti-ESG funds.
Because of the underperformance on one side and also the still ongoing necessity for especially “dirty” companies to sustain our standards of life as well as cultural aspects, some investors grouped together and decided to start so-called anti-ESG funds.
Among the more prominent advocates were Bill Ackman and Peter Thiel who supported Pharma investor Vivek Ramaswamy to focus on “excellence over politics”.
Or as Ramaswamy described it:
“Americans want iconic American brands like Disney, Coca-Cola and Exxon, and US tech giants like Twitter, Facebook, Amazon and Google to deliver high-quality products that improve our lives, not controversial political ideologies that divide us.”Vivek Ramaswamy
Together, they started the Strive U.S. Energy ETF (ISIN: US02072L7221, Ticker: DRLL). All the necessary information can be found here.
As of writing this Weekly, the fund had nearly 380 mn. USD in AuM. In total, they currently have slightly more than 50 positions, but more than half has only a micro-weighting.
The performance so far (since inception on 09 August 2022) has so far been +13%.
The portfolio holdings are – not so surprisingly – very heavily concentrated on energy companies. What I found somewhat surprising is the very high concentration in just two stocks, Exxon Mobil (ISIN: US30231G1022, Ticker: XOM) as well as Chevron (ISIN: US1667641005, Ticker: CVX), together comprising ca. 40% of the fund.
The Strive U.S. Energy ETF is a comparatively small fund, measured against the proclaimed ESG funds from above.
But in comparison to other such anti-ESG or Pro-America funds, it is big.
I could find two other funds with a similar approach, namely:
- Point Bridge America First ETF (ISN: US26922A6284, Ticker: MAGA)
already set up in 2017, performance since then +50%, current market cap 18 mn. USD, information here
- God Bless America ETF (ISIN: US8863644626, Ticker: YALL)
set up in October 2022, performance since then +6%, current market cap 26 mn. USD, information here
The first fund, the MAGA, has a different approach: All holdings are more or less equally weighted, nearly no technology, but also not that much energy as maybe expected.
Here is an overview of their holdings by sectors:
The fund is not an aggressive “dirty energy” fund, but you won’t see many companies from the industrial sector in the proclaimed ESG funds. I think the name “America first” describes it well.
The second fund, the God Bless America ETF is the youngest of these three funds. It started only barely two months go in October 2022, but so far has 26 mn. USD in AuM and hence more than the prior fund that has been on the market for five years now.
Let’s have a look at the sectors that this fund is invested in:
The first thing that comes to my mind is, why is an “America First” fund not investing more into energy which is their lowest-weighted sector?
Here is an overview of their individual holdings:
Here, I don’t understand the philosophy and cannot explain for example why Nvidia (ISIN: US67066G1040, Ticker: NVDA) is the biggest position.
I would like to leave it with that, because I just wanted to show that there are also other “motto-funds”. The Ackman and Thiel backed fund is the most aggressive and anti-ESG example.
To close, here is a funny notice from Twitter that made me smile a few days ago (see at the bottom):
Ah understood. FTX – the now bankrupt crypto exchange – that had no meaningful purpose for society, had a better ESG rating than Exxon.
Maybe you see, why I distrust such strange labelings that are more pursing political brainwashing than any serious change for the better.
And pulling money out of the pockets of those who believe in this.
By the way, those ESG funds discussed – to their defense – are so big that they can only invest in the biggest companies. But this does not qualify them automatically as “clean” ESG funds form my perspective.
Due to such strange politically-led labelings, high confusion and also misperceptions lead to a reality distortion.
This brought me to a company I’ll introduce in my next research report, due on Friday, 23 December 2022, exclusively for my Premium Members.
– has an easy to understand and proven business model
– is labeled as dirty, but is needed for the “energy change”
– has record earnings
– is valued with laughable multiples
– made new all-time highs this year
– has more than 10% of its market capitalization in net cash on its balance sheet (debt free business)
– started a new shareholder return program during 2022 and has a fat double digit dividend yield (>20%) that is well covered by cash flows
– has enough dry powder to repurchase its own shares, soon
All this, just due to ESG.
Today’s Weekly showed you what is really behind ESG funds. They are Big Tech or Blue Chip funds without any clear differentiation that would qualify them as “clean”.
The performance of the ten biggest such funds has been below even the S&P 500 this year.
Allegedly, investors are willing to sacrifice “some performance” for the better (and for higher fees). What they got was more and riskier concentration in higher valued stocks. The winners, however, were taken out.
On the other hand, we have a growing anti-ESG trend. However, this is not convincing, either, but shows that we are by no means steering just in one direction.
The best way from my perspective is doing your own research and also to manage your own portfolio with stocks you understand. Don’t fall for any labels.
Last week, I did my second livestream with Daniel from InvestFlow (German language).
We talked about the current environment, the latest decision of the FED and its implications for equities, discussed some individual stocks and exchanged thoughts about the coming year 2023.
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