The German sustainable fund market in Q4 2020
Sustainable fund assets grew by almost a third in 2020 thanks to record mutual fund inflows
Despite the Corona virus pandemic, 2020 ended with a new high in assets under management by sustaina-ble funds. At the end of the year, the total invested in sustainable funds was 147 billion euros. This represents a growth of 33 billion euros (29 percent) compared with the end of the previous year. The volume of mutual funds rose by as much as 52 percent to 91 billion euros. By comparison, the increase for conventional funds was just under 3 percent. The assets of sustainable special funds stood at 56 billion euros at the end of 2020, corresponding to a growth of around 4 percent.
The main driver of the positive development in sustainable mutual funds was the large amount of new investment. With inflows of around 21 billion euros, 2020 was by far the most successful year to date. Sustainability funds are also playing an increasingly important role in the overall market: their share of new business in all retail funds was around 48 percent last year while in 2018, it was only 16 percent. It is noteworthy that even in March sustainable mutual funds hardly recorded any net outflows, whereas 21 billion euros flowed out of conventional funds. Since then, monthly net inflows into ESG funds have grown rapidly to three billion euros in December. The rapid market dynamics are also reflected in the fact that more and more sustainable products are being launched.
Currently, German investors can choose from a range of 878 share classes (including 44 ETFs). This is 242 more than in the previous year. In the case of sustainable special funds, however, the net volume of funds fluctuated around zero. In our opinion, two factors are currently holding back sales: On the one hand, many institutional investors, such as churches and foundations, have been investing according to environmental or social criteria for many years. On the other hand, there seems to be a tendency for the time being not to formally classify special funds as sustainable because of the uncertainty surrounding future regulatory requirements - even if some of the funds already take sustainability aspects into account in their investment decisions.
Last year's strong performance is also likely to have supported demand for ESG funds. The table below shows the average return of the five main groups of sustainable mutual funds (by number of products) for the calendar year 2020 compared to conventional funds of the same group. In all five groups, including global equity funds and corporate bond funds, sustainability funds showed higher returns. Taking volatility into account, the risk-adjusted return is 0.1 to 0.2 points higher than that of conventional funds. However, other factors like sector and factor mix of many sustainable strategies, which was advantageous during the Corona crisis, may also have played a role1.
| Return p.a. in percent | Return difference | Difference of risk-adjustet return2 | |||
|---|---|---|---|---|---|
| Fund group | sustainable | conventional | in percent | in percent points | |
| Balanced funds, moderate equity exposure, global | 3,2 | 2,3 | 0,9 | 0,2 | |
| Equity funds global | 7,1 | 3,4 | 3,8 | 0,2 | |
| Fixed income funds corporate bonds | 4,6 | 2,0 | 2,6 | 0,2 | |
| Balanced funds, large equity exposure, global | 5,3 | 1,4 | 3,9 | 0,1 | |
| Balanced funds, large bond exposure, global | 3,1 | 0,7 | 2,5 | 0,1 | |
1 See, for example, Hasaj, Milot, and Bernhard Scherer (2021). "Covid-19 and Smart-Beta: A Case Study on the Role of Sectors." EDHEC Risk Working Paper.
2 Measured as the difference in the respective "sharpe ratio", i.e. the excess return (compared with a risk-free interest rate) taking volatility into account. Values above zero indicate a better risk-adjusted performance of sustainable funds.