Monday Morning Memo: Were ESG-Related Funds More Resilient In 2020?

Looking back on the year 2020, it can be said that no investor has seen such a year before, even if one looks back to the Great Depression or World Wars I and II. The year started off with fears about a possible war between North Korea and the U.S., an upcoming trade war between the U.S. and China, and a possible hard Brexit. In a normal year, these geopolitical tensions would have put enough pressure on the markets to cause a major downturn. But in mid-February the coronavirus, which has been seen as a local problem in China before, was detected in more and more countries around the world and finally caused the COVID-19 pandemic.

Governments around the globe closed their borders, economies, and societies to prevent the spread of the virus. These lockdowns led to a major downturn in the equity markets in March and an additional sell-off in other liquid assets as investors wanted to protect their money. Within these market conditions, the price for oil went below zero for the first time in history.

That said, the governments did not only introduce lockdowns, they also released fiscal stimulus packages to support companies and residents and to cushion the expected economic downturn. In addition to these relief packages, central banks around the globe restarted or increased their quantitative easing programs to keep the liquidity in the markets up. Altogether, the amounts that have been spent for all the relief packages from the different institutions globally reached a level that has never been seen before.

As a result, the securities markets returned in general to a normal pattern, while equity markets around the globe rallied and hit new all-time highs.

All-in-all, 2020 can be considered as a year in which active asset managers had the chance to deliver a high value added compared to passive strategies since they can use cash as a risk buffer in times of market turmoil and may invest in high beta stocks in an upswing of the market. Generally speaking, active fund managers of equities funds did not deliver on this target during the market downturn in the first quarter of 2020, as 55.40% of the funds were underperforming their technical market indicator. Nevertheless, we witnessed a higher resilience against losses for funds which followed an ESG-related investment strategy during this time period. 

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