Market challenges and strong outflows from Vanguard have affected the size of assets in Australasian sustainable funds, which stood at US$27 billion ($41 billion) in the second quarter, according to research.
Morningstar’s latest Global Sustainable Fund Flows: Q2 2023 in Review notes Vanguard’s sustainable fund assets in Australia almost halved in the last three months, falling to US$2 billion at the end of June from US$3.6 billion at the end of March.
The Australasian sustainable funds universe bled US$1.66 billion in the second quarter of 2023, driven by passive strategies that saw redemptions of US$1.83 billion.
“Vanguard was responsible for the entirety of these outflows, its ethically conscious international shares funds taking the biggest hit across AUD and NZD share classes, with redemptions of US$1.32 billion,” the report stated.
It marks the second quarter of Vanguard experiencing heavy net outflows even as inflows fell 91 per cent to an “anaemic” $214 million in Q1, down by more than $2.4 billion.
This month, the corporate regulator lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia for alleged greenwashing. ASIC alleged Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria.
The report noted: “Significant outflows also occurred in [Vanguard’s] ethically conscious global aggregate bond hedged in NZD ($390 million) and its ethically conscious Australian Shares strategy ($142 million). These large withdrawals were entirely attributed to one institutional client who moved its investment from the Ethically Conscious funds into mandates managed by another firm.
“Institutional redemptions at Vanguard are the direct result of the firm’s strategy to withdraw from offering segregated mandates and to scale back from the institutional investor segment to focus on serving individual investors, either directly or through the financial intermediaries that support them.”
Inflows into Australian active sustainable funds were muted at some $173 million in net new money.
Fixed income strategies attracted around $85 million in inflows while equity and miscellaneous funds registered significant outflows of $502 million and $1.28 billion, “entirely explained by Vanguard fund redemptions”, Morningstar said.
Notably, there were no new sustainable funds launched in the second quarter of 2023.
The report observed: “Launches so far this year are significantly lower than the previous year. This can be only partly attributable to the challenging market conditions. As of the end of June 2023, we counted 199 strategies in our Australasian sustainable fund universe.”
Morningstar’s analysis also observed a concentrated Australian sustainable funds market remains quite concentrated, with the top 10 funds accounting for around 70 per cent of total assets.
Following its merger with Christian Super, Australian Ethical has increased its market share to take the top position (20 per cent).
DFA sits in second place (11.9 per cent), replacing index giant Vanguard who fell to fourth position (7.9 per cent).
Betashares held 10.9 per cent of the sustainable FUM market share, Mercer held 5.8 per cent and Pendal held 5.4 per cent.
