Barron’s Top-Performing Sustainable Investment Fund of 2021

But one thing is certain: As these disparate events played out on the national stage, investors poured gobs of money into funds buying sustainable companies. Some $56.3 billion flowed into the funds in the first nine months the year, more than the $51.2 billion for all of 2020. As of September 2021, assets in sustainable funds totaled more than $330 billion. And the funds generally proved to be rewarding, according to Barron’s sixth annual ranking of actively managed U.S. large-company stock funds with an above-average sustainable ranking from

Morningstar.

More than a quarter of the funds that we ranked—41—beat the

S&P 500
index’s total return of 28.7%, a much better turnout than the 19% of all active managers who beat the index. In all, the 157 sustainable funds that we tracked returned 26.1%.

It was an eventful year for sustainable investors, culminating in the 26th United Nations Climate Change Conference in Glasgow, Scotland, in November. The annual summit helped underscore the challenge and urgent need for action if we are to avoid the catastrophic effects of global warming. Climate change, in particular, has become increasingly important to businesses and investors—although the effects of the pandemic are still revealing great inequality that is also in focus. Investment managers of all stripes are seeking out companies that not only generate strong profits, but also do well when it comes to environmental, social, and governance, or ESG, factors.

“For folks who are focused on sustainability—what interesting times,” says Katherine Collins, head of sustainable investing at Putnam Investments and portfolio co-manager of the $582 million

Putnam Sustainable Future
(ticker: PMVAX) and the $6.8 billion

Putnam Sustainable Leaders
(PNOPX) funds.

“The importance of key sustainability issues is more and more obvious on a day-to-day basis,” adds Collins. “We are finally in the era where you don’t have to explain why this is a relevant business issue, or why fundamental analysis needs to incorporate relevant sustainability focus.“

Indeed, a recent

Morgan Stanley report showed that 79% of U.S. individual investors are interested in sustainable investing. Among millennial investors, that figure was at an all-time high of 99%.

Yet performance remains a top concern. Morgan Stanley’s report found that 70% of individual investors believed that sustainable investing meant sacrificing some financial returns. But the authors demurred. “This stands in contrast to the performance data,” Morgan Stanley says.

The performance of many funds on the Barron’s list bears this out.

High-quality companies tend to score well on sustainability, and not surprisingly, the top funds on our list held companies with strong earnings and revenue potential. That’s partly why more than 25% of the funds on our list beat the S&P 500’s return, whereas just 19% of all actively managed funds beat the market, according to Morningstar Direct.

It is worth noting, however, that only 28 of the 157 funds on the list have a sustainability mandate. Morningstar essentially takes a snapshot of each portfolio and gives it a sustainability grade based on the companies it owns—a high sustainability rating doesn’t necessarily mean that ESG criteria are a priority for these funds. Indeed, the first eight funds, ranked by 2021 performance, don’t have a sustainability mandate. And 62 funds—all of which don’t have a sustainability mandate—appear on the list for the first time this year.

Tom Marsico, the celebrated growth investor whose

Marsico Growth
fund (MGRIX) was No. 2 on the list for 2020, says he invests in companies where “there’s a lot of intellectual property,” and almost by default “that leads to what I consider to be clean companies that don’t have huge impacts on the air or water or other areas that would impact your life.” These companies also tend to be leaders in providing good healthcare for employees and inclusive work environments, he adds.

To construct our list, Barron’s looked at all of the actively managed large-company stock funds—both mutual and exchange traded—that earned a “high” or “above average” sustainability rating from Morningstar. We included all funds with an explicit mandate to invest according to any sustainable or ESG principles—even though some of them have lower sustainability ratings from Morningstar. We then ranked them according to their 2021 performance.

The No. 1 and No. 2 spots on our list are the $1.3 billion

HCM Tactical Growth
(HCMGX) and the $1.3 billion

HCM Dividend Sector Plus
(HCMNX) funds, both managed by Vance Howard, CEO and portfolio manager of Howard Capital Management. “I’ve been the portfolio manager on virtually every trade this firm has ever made,” says Howard, who founded the firm in 1999.

The quantitative shop uses a proprietary technology called the HCM-BuyLine, a “stop-loss indicator” designed to mitigate downside risk and “remove emotion from the investing process.” Tactical Growth is very concentrated, with just 22 stocks, and can own companies in any industry or of any size. The fund was overweight technology stocks in 2021, and its positions in

Nvidia (NVDA) and

Advanced Micro Devices (AMD) helped drive performance. Its largest holding is

Amazon.com (AMZN), but the fund has a very high active share, 79 out of 100—a measure of how different it is from the index.

The Dividend fund is also concentrated, though it has about 50 stocks, all of which pay a dividend. One of the best performers was a big stake in the

iShares Select Dividend
ETF (DVY). Toward the end of 2021, Howard also bought

AT&T (T). “We bought that at around $23.50, almost paying a 9% dividend yield. It was just such a low-risk trade.” The stock is currently trading around $27 a share.

Though Howard doesn’t incorporate ESG metrics into his stockpicking, he says he wasn’t altogether surprised to debut on the list this year. “We trade a lot of tech stocks; we really don’t trade a lot of energy and things like that. So, that brings our sustainability to a very attractive level,” he says.

No. 3 is the $6.5 billion JNL/Goldman Sachs 4, another fund making its first appearance on the list—and another quant fund. Sold by Jackson National Life, the fund is available only to clients of Jackson’s variable annuity products. It’s managed by two subadvisors,

Goldman Sachs and Mellon Capital Management.

“Goldman Sachs is responsible for running the quantitative screens and identifying the list of stocks that look attractive based on various metrics. Mellon Capital is responsible for trading those securities,” explains Bill Harding, senior vice president and chief investment officer at Jackson National Asset Management, a subsidiary of Jackson that serves as the investment manager responsible for selecting and monitoring the external asset managers of the JNL funds.

Goldman screens for stocks that look attractive on value, quality, and momentum factors, and typically owns them in equal parts. Last year, Harding says, the momentum factor provided the biggest boost to performance, along with good choices in the consumer-discretionary, technology, materials, and industrials sectors.

The fund benefited from being underweight Amazon, which was a “relative laggard” in the sector, and from owning retailers such as Lowe’s (LOW) and Kohl’s (KSS). Other positive contributors included

Seagate Technology Holdings (STX),

Juniper Networks (JNPR), Albemarle (ALB), Nucor (NUE), and

Old Dominion Freight Line (ODFL).

The fund isn’t managed for sustainability, but Harding says he is seeing more of the firm’s asset managers do more in this area. “The largest asset-management companies that we’ve partnered with have added to their resources in sustainable investing,” he says. “They’ve integrated more ESG into their processes. It is an important trend in the industry.”

No. 4 is the $2.4 billion

Glenmede Quantitative U.S. Large Cap Growth Equity
fund (GTILX), up from 102 last year. Alex Atanasiu, portfolio manager and quantitative equity officer at Glenmede Investment Management, says there are five guiding principles for the fund, the first of which is a systematic approach.

“We want to pick up on factors that are present across market cycles systematically, so we rebalance each month,” he says. Most of these factors are straightforward—valuation and other fundamental ratios, such as earnings-estimate revisions. The fund has less emphasis on momentum—how quickly a stock is rising—because “momentum is a very finicky factor.”

While the fund doesn’t have a sustainability mandate, Atanasiu views the strategy as an “ESG-integrated strategy.”

No. 5 is the $8.4 billion

Fidelity
fund (FFIDX), run by Jean Park. Launched nearly 100 years ago, on April 30, 1930, the fund is making its first appearance on the list.

Park’s investment process is focused on quality and valuation. She likes high-quality, durable businesses. “My sweet spot is finding companies that generate positive free cash flow, where fundamentals are improving,” she says, which “also tend to be sustainable companies.”

Park also digs into a company’s track record on capital allocation. “I like to see signs of positive capital allocation. So, whether that means that there’s a focus on using the free cash flow to fund buybacks, dividends, or creative mergers and acquisitions, those are all part of the mosaic of what leads me to look at investments.”

Alphabet (GOOGL),

Microsoft (MSFT), and

Apple (AAPL) helped drive performance. So did Nvidia. Park sold her stake in Nvidia in late 2019 but started buying again in late 2020, and now it’s the sixth-largest position in the fund.

While the fund doesn’t have a sustainable mandate, Park says that “ESG is definitely a part of my holistic investment process.”

Fund managers are seeing more evidence of sustainable investing becoming de rigueur.

Park says she relies heavily on Fidelity research, which increasingly focuses on ESG. “I like looking at ESG and saying, ‘Wow, I think this has the potential to be a much bigger category.’ And can I look at stocks in a different way, or just have another input into my process that helps me think, ‘What are the ones that I’m going to want to own for the longer term that might also be beneficiaries and score really well on these metrics?’”

Brandon Geisler, a portfolio manager at Marsico, believes that in the future, the industry will do a much better job when it comes to sustainable investing.

“It’s increasingly just a part of running a great business,” he says. “You have to consider all these things, and particularly if you want incremental investment in your business and consider all your stakeholders, versus maybe 15 to 20 years ago, [when] you could be much more focused on one particular stakeholder.”

For Putnam’s Collins, 2021 was in some ways a watershed year. “We’re getting beyond the entry-level discussion on some of the biggest and most interesting and important issues of our time,” she says. “If you go back a few years, many investors and many company management teams were just starting to look at things like the carbon intensity of the business. That is a really important starting point.

“I don’t want to dismiss that at all. But that has really dramatically accelerated, and now we’re having much more sophisticated discussions around: What does a circular economy look like? And if you are already addressing your carbon intensity, how might you further improve that by thinking about the full life cycle of your products out in the world?”

Investors are increasingly using mutual funds to do just that.

Our Methodology

To construct our list, Barron’s looked at all of the U.S. large-company stock funds in Morningstar’s universe. All actively managed funds—mutual and exchange traded—with more than $300 million in assets were initially included.

We then screened for funds that received a “high” or “above average” sustainability rating from Morningstar. These ratings are based on each fund’s holdings on a particular day; they do not reflect how a portfolio may have changed over the year. We also included all funds that have an explicit mandate to invest according to any sustainable or ESG principles—even though some of them may have lower sustainability ratings from Morningstar.

A further note on the methodology: For each fund on the list, we’ve chosen the most accessible share class, usually the A shares, investor shares, or no-load shares. But in some cases, the fund offers shares only through more-exclusive channels, such as financial advisors or other institutional accounts. We’ve included those funds too, but note that these share classes might not be available to all investors and might have higher minimum initial purchase requirements.

—Evie Liu

Write to Lauren Foster at [email protected]