For the year to date, through June 11th, ESG funds have been generally outperforming their non-ESG peers. The chart below shows the comparison between SNPE, an ESG tilted S&P 500 fund compared to SPY, one of the largest S&P 500 funds out there.
As you can see, SNPE has been ahead of SPY since February. So what has driven the performance differential between the funds? And is this performance difference evidence for systematic out-performance of ESG strategies or just an aberration?
Using SNPE for comparison purposes works well, because the fund only owns stocks also owned by SPY, and the differences are in stocks that SNPE leaves out, and stocks that SNPE owns at a higher concentration that SPY. This lets us compare stock selection, as if SNPE owned stock outside the S&P 500, it would be unfair to compare SPY to SNPE.
So, lets begin!
From a sector weighting perspective SNPE and SPY line up pretty well, though SNPE has a slight overweight in Tech and Communications Services (which include companies like Facebook and Google)
These differences alone are not enough to drive the differential performance between the funds, but do show that SNPE is tilted slightly more towards FAANG stocks.
The chart above depicts total contribution to return (measured in basis points) for each sector. As you can see our ESG fund, SNPE, has outperformed this year especially in the Information Technology, Consumer Discretionary and the Industrials sectors. Above we saw that SNPE has more of their fund allocated to the Information Technology sector, but this overweight position does not fully explain the higher contribution to return. To further decompose the return, you can look at the contribution to return for each percentage of weight in the portfolio. That way we can remove the effects of different sector weightings from the results.
The chart above shows each sector’s contribution to total return of each percentage point of the sector owned. Here we find that, indeed, SNPE gets more bang for their buck in the Consumer Discretionary, Industrials, Materials, and Information Technologies sectors, but actually lags in the Communications Services and Real Estate Sectors.
Since SNPE owns a subset of the stocks held by SPY and nothing outside of that, the two explanations for differences in sector contribution are relative weighting of stocks and the avoidance of some stocks.
Above we see the marginal contribution to return of the stocks held in SPY’s portfolio and not SNPE. The red bars represent the marginal return for SPY for each percent of weight in stocks held in SPY but not SNPE. This shows us how avoiding certain stocks helped or hurt SNPE during this year. Notable areas where SNPE’s avoidance of certain stocks was extra helpful are Consumer Discretionary, Marterials, Utilities and Industrials. On the other hand, avoiding some stocks hurt SNPE’s performance in the Communications Services sector and the Real Estate sector. By and large the negative screening (avoiding certain stocks) added value for SNPE.
Above the bars represent the marginal contribution to SPYs return of stocks that both fund hold. This data series shows the effect of the relative weighting of the securities owned in both funds, or put more simply it shows how SNPE did at actively picking stocks. As you can see SNPE did a good job in Consumer Discretionary, but did pretty poorly in the Energy sector. Again, by an large the stock weighting differentials between the funds were a value add for SNPE.
As I have laid out above, both avoiding certain stocks helped SNPE and the relative weighting of stocks owned by both fund helped SNPE. Let’s drill down one layer deeper and look at the individual securities that helped drive the performance difference this year.
The red bars above show the contribution difference, the delta between what stock added to the return of SPY and what that same stock added to the return of SNPE. The yellow bars show the weight of each security in the SNPE holdings, and the blue bars show the weight difference between SPY and SNPE weightings. As you can see, overweight positions in Amazon, Apple and Microsoft were three of the five largest contributors to the return difference, thus the FAANG comment above. Conversely, not owning PayPal or Netflix was detrimental to SNPE’s return for the year. Most interesting to me is that SNPE’s overweight position is Exxon Mobil detracted from it’s return. The drag on return doesn’t interest as much as the fact the the ESG focused fund holds more Exxon Mobil than its non-ESG peer.
Perhaps the argument is that Exxon Mobil is the least bad oil company, and that may or may not be true, but it does not excuse the ownership of Chevron, Conocophillips, Kinder Morgan, Occidental, Hess, Apache, Newmont Mining, or Freeport-Mcmoran. I suppose the bigger question is what ESG means but that is the subject of another article.
In sum, for the year to date, the stock and sector selection strategy used by SNPE delivered out-performance. It will be interesting to see if said strategies can continue to deliver over time.
Thanks for reading