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Art. 9 Equity Funds Turnaround in Q4 After Challenging 2023

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Stockholm (NordSIP) – The fourth quarter of 2023 saw market conditions improve for sustainable investors, thanks to expectations that monetary policy might deviate from its recent contractionary path. By the end of the year, tech companies weighed less in market indices and conditions for renewable energy companies stabilised. Nevertheless, the year was not kind to sustainable investors.

To better understand how these and other trends affected the performance of funds classified as Article 9 (“Dark Green”) under the EU’s Sustainable Finance Disclosures Regulation (SFDR), NordSIP reached out to 17 global funds actively managed by Nordic-based managers.

The Recession That Never Came & the Magnificent 7

Lower inflation at the end of 2023 led markets to believe that monetary policy would become more accommodating in 2024. According to Kasper Brix-Andersen, portfolio manager of the Danske Invest Global Sustainable Future fund, “overall, the year was dominated by the expected US recession that never came and inflation coming down anyway.” Tom Olsson, co-portfolio manager of the SEB funds explains that in “Q4 we saw improved macro data and softer central bank guidance, which made more interest rate-sensitive stocks rebound strongly.” Marcus Grimfors, portfolio manager of the CB Save Earth fund, argues this led to “lower discount rates, which means investors increased the value of long-term cash flows relative to short-term [ones].”

Overall, these trends had a positive effect on the relative performance of the Article 9 SFDR funds surveyed compared to the previous two quarters.

Source: fund companies

 

Nevertheless, the improvements witnessed in the last quarter of the year could not overcome the damage caused by the previous three quarters, leading most funds underperforming their benchmarks for the year.

The Magnificent 7 Take a Breather

Beyond the impact of macroeconomic shifts during 2023, Danske Invest’s Brix-Andersen highlights the importance of the Magnificent 7 (Apple, Nvidia, Microsoft, Alphabet, Amazon and Tesla). “Market concentration in the US was very high [during the year]. 60% of the total return of the S&P500 index during 2023 can be attributed to the Magnificent 7. The Nasdaq 100 delivered a total return of 55% (in USD), the best since 1999.”

“At the end of 2023, the magnificent 7, which weigh heavily on global benchmarks, also took a breather from the strong rally these companies experienced earlier in 2023, fuelled by the A.I. hype,” SEB’s Olsson argued. According to Olsson, holdings in Wiwynn and Nvidia had a positive impact on performance throughout 2023, while Adobe was one of the top performers during the fourth quarter.

Cyber Security was another tech angle that yielded returns. “Cybersecurity was also one of the major technology trends last year. Despite companies being affected by higher costs and inflation, cybersecurity has been a priority for companies partly due to an increase in serious and complex cyberattacks, generative AI, and geopolitical tensions. Due to this, spending in this segment should prove to be rather sticky – and an area a majority of companies must continue to prioritise,” said Phillip Ripman, portfolio manager of the Storebrand Global Solutions fund, pointing to the performance of Crowdstrike, Palo Alto and Okta.

Renewables Rebound

As noted in the previous performance review, rising interest rates were particularly detrimental to the performance of renewable energy companies, due in part to consumers’ reliance on credit to finance household energy upgrades. However, the sector appears to have stabilised thanks, in no small part, to monetary policy being perceived to be on a more accommodating path.

“In the fourth quarter, solar companies found a bottom and managed to claim some gains after a poor first half of the year followed by an even worse Q3,” SEB’s Olsson explains. Johan Eriksson, portfolio manager of the SEB funds, went so far as to argue that “the upturn in renewables constituted the main development of the fourth quarter of 2023.

The importance of monetary policy to this shift did not go unnoticed. “For the full year, the renewables theme was one of the main negative contributors to performance. However, when looking at Q4 renewables made positive contributions to portfolio performance, mainly driven by the wind- and hydro-related holdings such as Vestas and Brookfield Renewables. We think that this move is partly explained by the Federal Reserve turning dovish sooner than the market had expected,” SEB’s Eriksson explains.

“Indications of potential interest rate cuts in 2024 drove the performance of global equities during the fourth quarter of 2023. Interest-sensitive sectors, such as information technology and real estate, excelled, while the energy sector experienced a downturn due to declining oil prices. Havsfonden’s investments in clean energy production and technology were the largest contributor to the returns during the period,” Oskar Schyberg, portfolio manager of the FCG Havsfond adds.

“Long-duration assets such as the renewable utility company EDPR, and small-cap names such as CellaVision were strong during Q4,” Huizi Zeng, portfolio manager of the Espiria SDG Solutions fund, tells NordSIP, mentioning also SolarEdge, Cadeler (a European leader in the offshore wind installation and servicing market) and renewable developer OX2 as examples.

The last quarter of 2023 also saw political commitments to renewable energy. “In December, the COP28 climate summit in Dubai concluded with a historical agreement to transition away from fossil fuels. Another success is the goal to triple the global renewable energy capacity by 2030 and doubling energy efficiency improvements by 2030. The climate agreement serves as a clear signal and reminder of the significant investments that need to be made within a short timeframe to enable the energy transition and reduce global emissions. This is particularly interesting for the fund’s investment themes in renewable energy and energy efficiency, such as electrification, heat pumps, insulation, and electric vehicles,” Johanna Ingemarson, portfolio manager of the Simplicity Green Impact Fund

Healthcare Remains Popular

Christopher Sundman, co-portfolio manager of the Handelsbanken Hälsovård Tema fund several companies benefited from the rising interest in healthcare. However, while pharmaceutical treatments with applications in diabetes and obesity care continued to drive expectations, other developments also caught his eye.

“Diabetes and obesity care continued to dominate performance during the fourth quarter of 2023. Novo Nordisk, Eli Lilly and Co and Zealand Pharma benefited significantly from this demand. Other interesting healthcare companies also include Swedish Orphan Biovitrum (Sobi), which experienced high demand for its RSV vaccin, and Vertex, a leading biotech company in cystic fibrosis that also announced strong data for pain reduction in spinal nerves,” Sundman explains.

“In December, the market finally saw broad recovery of the healthcare sector – otherwise a laggard sector during 2023. The Fund’s health care holdings, including multiple pharma, medtech, diagnostic and service providers further outperformed the benchmark sector in December. We remain confident in the overall portfolio strategy despite some disappointment in recent performance, and we continue to take pride in the measurable positive impact generated over time through our fund,” says Huizi Zeng, portfolio manager of the Espiria SDG Solutions funds.

The CB Save Earth fund December 2023 quarterly update cites ABB, Watts Water and Schneider Electric as the main contributors to the fund’s performance during Q4, and WSP Global, Spirax-Sarco and Enphase Energy as the largest detractors. “Watts Water is active in water efficiency and ABB and Schneider in energy efficiency. The latter two have continued to perform well and have also been the largest contributors over the last 12 months. Enphase and Spirax-Sarco were sold during the quarter, which explains their low average portfolio weights,” CB Fonder’s Grimfors explains.

Equality and Consumer Staples

Aside from these common trends, portfolio managers also discussed three idiosyncratic themes. Equality was an important subject for SEB. “Companies that are leaders in gender equality and social sustainability also performed in line with the market after lagging in Q2 and Q3,” SEB’s Olsson adds.

Meanwhile, Espiria benefitted from exposure to consumer staples. “During Q4, the fund saw outperformance in consumer staple names, Danone, among others, continuously delivers against its growth restoration targets set in 2022,” Espiria’s Zeng concludes.

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