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Fewer Launches, Higher Inflows for Canadian Sustainable Funds in Q4

Sustainable-investment assets in Canada saw an increase in the fourth quarter, driven by positive net inflows even as fewer new products launched, Morningstar finds. 

Ruth Saldanha 19 January, 2023 | 4:48AM
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According to the Q4 2022 Sustainable-Investing Landscape for Canadian Fund Investors report, sustainable-investment assets in Canada saw an increase in the fourth quarter, driven by positive net inflows. However, the market was marked by fewer new product launches, likely influenced by investor caution in light of the ongoing global economic slowdown, the report finds.

“Despite fewer new product launches, net inflows into sustainable funds and ETFs totalled $660 million in the fourth quarter, an increase from the previous quarter at 164%,” said the authors of the report, Morningstar Manager Research Analyst Abdulai Mohamed and Morningstar Canada’s Director of Investment Research Ian Tam. You can access the entire report here.

The Market is Growing

The market for sustainable investments in Canada saw an increase in asset size during the fourth quarter of 2022, despite a lack of new product launches, the report finds. According to Morningstar data, assets in the sustainable-investment space stood at $37.9 billion at the end of the quarter, representing a 7.9% increase from the previous quarter and a 2% decrease on a year-over-year basis. Both actively and passively managed strategies saw a 7% increase in assets from the previous quarter.

Canadian sustainable asset flows

In the fourth quarter of 2022, Tam and Mohamed found that the top 10 funds showed net inflows of an estimated $1,114 million during the quarter. This represents a 101% increase from the previous quarter. Among these top funds, NEI products experienced the largest positive flows, accounting for 87% of the total inflows. The majority of these inflows were seen at the beginning of the quarter, with December experiencing a decrease in investment, representing only 4% of total inflows for the quarter.

The authors found that the trend of investor interest in fixed income over equities observed in the third quarter of 2022 did not continue into the fourth quarter; instead, there was a resurgence in equities, showing that the sustainable investor is not immune to the fallacies of market-timing. The asset class increased by 11.9% in size. Conversely, fixed income saw a 2% decrease in size. Alternative funds saw an increase of 5.6%. As of the end of the fourth quarter, equities make up 71% of sustainable-fund assets, followed by fixed income at 23% and the remaining assets allocated to allocation and alternative funds.

How Did Sustainable Funds Perform?

The performance of sustainable investments in Canada relative to Morningstar Category averages for the fourth quarter of 2022 showed mixed results. ”While some categories such as Canadian equity balanced and Canadian fixed income balanced had a significant number of funds in the top quartile, others such as Canadian neutral balanced and energy equity had a majority of funds in the bottom quartile,” Mohamed and Tam say.

Overall, the results indicate that sustainable investments in Canada have had a challenging quarter in terms of performance relative to their traditional counterparts. The authors believe this can be attributed to the ongoing economic uncertainty caused by the pandemic and the fear of a recession, which has affected the sustainable-investment market as well.

 

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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