Morgan Stanley
  • Institute for Sustainable Investing
  • Oct 8, 2024

Sustainable Funds Modestly Outperform as Flows Slow in First Half of 2024

Sustainable funds had slowing inflows while reaching $3.5 trillion in assets, and they posted a median return of 1.7% compared to traditional funds’ 1.1%.

KEY TAKEAWAYS

  • Sustainable funds had inflows of $20 billion in the first half of 2024, less than in recent periods, and assets rose to $3.5 trillion.
  • Sustainable funds outperformed traditional funds by 0.6 percentage points in the first half of 2024, driven by equities.
  • Over the past five years, sustainable funds have achieved a median performance of 4.7% more than traditional funds.

Sustainable funds modestly outperformed traditional peers during the first half of 2024, according to a new “Sustainable Reality” report from the Morgan Stanley Institute for Sustainable Investing. Exposure to the strong performance of large-cap equities, as well as lower volatility, helped sustainable funds maintain a slight edge, although their performance lead narrowed to 0.6 percentage points in the first half of 2024 from 4 percentage points for the full year of 2023.1

In the same period, inflows to sustainable funds brought in $20 billion (0.6% of 2023 year-end assets under management), which drove AUM to a record $3.5 trillion. However, a spike in outflows in May of $12 billion dampened the overall effect, and the rate of inflows was notably slower than in prior years. Moreover, contrary to 2023, inflows into traditional funds outpaced those of sustainable peers during the period.

Sustainable AUM, USDbn

Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of August 3, 2024. Flows data can be subject to restatements due to lagged fund disclosures.

The Equities Effect

For the first half of 2024, sustainable funds’ median return across asset classes was 1.7%, compared with traditional funds’ 1.1%. The overall strength of large-cap equities helped shore up returns of sustainable funds, since equity funds make up a larger proportion of the sustainable fund universe, at 57% compared to 39% for traditional funds.

Sustainable equity funds had a median return of 5.2% in the period, in line with traditional funds at 5.1%. Sustainable fixed-income funds had weaker median returns, at -1.7% compared to traditional peers at -0.4%.

1H24 Median Return by Asset Type

Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of August 3, 2024. * Other includes multi-asset, property, commodities and alternative fund types.

Taking the Long View

In the past five years, sustainable funds have delivered superior median returns in eight of 10 of the past half-year intervals. A hypothetical $100 investment in December 2018 would have risen to $135 by June 2024 if a sustainable fund achieved the median return in each period. That return is 4.7% higher than the median performance of traditional funds.

Long Term Performance (Dec 2018 = $100)

Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of August 3, 2024. Starting with December 2018 as $100, the lines show how median returns for sustainable and traditional funds have compounded over time.

Analysis of downside deviation, a measure of the likelihood of negative returns during a period, is also somewhat more favorable for sustainable equity funds than traditional equity funds in the first half of 2024. Using the S&P 500 as the benchmark, sustainable equity funds’ median downside deviation was -9.9%, while for traditional equity funds it was -10.6% in the first half of 2024.

Read the Full Sustainable Reality Report