Partner Article 9 Review: the Winners & Losers of 2023

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    Stockholm (NordSIP) – Following up on our coverage of the performance of Nordic-based equity and fixed-income funds classified under Article 9 of the EU’s Sustainable Finance Disclosures Regulation (SFDR), NordSIP returned to international asset managers to hear about their performance during the second half of 2023 and for the full year. NordSIP surveyed the performance of 12 global equity funds and 3 global fixed-income funds, from non-Nordic asset managers with whom NordSIP has an ongoing partnership.

    The figures suggest that sustainable equity funds continued to struggle after an already difficult first half of the year, due to a volatile environment and an AI-driven rise in the popularity of IT companies, which often tend to be outside the remit of Article 9 funds. Meanwhile, fixed-income funds made a comeback in the second half of the year thanks to exposure to duration, real estate and multinational organisations.

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    Equity Funds Continue to Face a Challenging Environment

    Among Article 9 SFDR global equity funds, the review considered 7 contributions from BNP Paribas,  3 funds from BlackRock, 2 funds from Stewart Investors as well as Royal London’s RL Global Sustainable Equity Fund and the WHEB Sustainable Impact Fund. Priority was given to funds for which it was possible to calculate the relative performance in Euros based on the information available.

    Only Royal London’s RL Global Sustainable Equity fund outperformed its benchmark, be it on a half-year or full-year basis. Sector selection and the macroeconomic environment remained the dominating factor determining performance according to the portfolio managers surveyed.


    Interest Rates and IT Capture the Market

    As was the case in the Nordics, inflation expectations, interest rates and AI were the dominant themes of 2023 among NordSIP’s partners.

    Ted Franks, Partner and Fund manager at WHEB also noted the importance of short-term volatility periods and macroeconomic developments. “Global equity markets were positive in 2023 but displayed some volatility. As is often the case with short-term volatile periods, macroeconomic factors played a big part. Specifically, expectations around inflation and interest rates drove large swings in market sentiment,” Franks said.


    George Crowdy, Royal London Asset Management

    “From a macro perspective, many of the key themes were consistent throughout 2023 and were characterised by generally resilient economic growth and falling inflation in much of the world. Market strength in Q4 was primarily driven by expectations of interest rate cuts occurring through 2024 and increasing confidence that most economies have past peak inflation and peak interest rates and will avoid severe recessions,” says George Crowdy, Fund Manager at Royal London Asset Management.

    “From a micro and thematic perspective, excitement around artificial intelligence as a new and significant growth driver for the technology sector continued and benefited semiconductor, cloud computing and software companies. Other key themes included excitement around obesity drugs, which may represent one of the largest new categories of drugs ever witnessed, and ongoing investment into the physical world as a result of ageing infrastructure, sustainability, and geopolitics driving on-shoring/near-shoring,” Crowdy continues.

    BNP Paribas also chose to highlight the dominance of the tech industry and their market capitalisation. “Overall, 2023 was a tale of two stories with US markets outperforming global markets and technology – not least the “Magnificent 7” driven by a rally in AI beneficiaries – being a significant driver of market returns given their extraordinary weight of market indices. The overall breadth of the market was as a result quite poor with very divergent underlying performance with utilities, energy, real estate and materials broadly underperforming the market, whilst technology and consumer discretionary outperformed,” say Barbara Heap and Victor Benavides, investment specialists at IMPAX AM, a delegated manager of BNP Paribas AM for BNP Paribas’ Climate Impact, Aqua, Smart Food and Global Environment funds.

    “The second half of 2023 was affected by significant macro-driven volatility as the market in late summer became worried that interest rates and inflation would stay “higher-for-longer” only to rally back strongly in November and December on the realisation that momentum in dis-inflation was accelerating market a likely end to interest rate increases and paving the way for central bank easing and lower interest rates through 2024 and 2025,” BNP Paribas’ analysis added.

    The Stocks that Drove Performance

    “Performance was broad-based and came from a variety of companies with different business models and exposed to different sectors and geographies. The top contributors to performance included TopBuild, a US provider of insulation to the residential and commercial building sectors, MercadoLibre, a Latin American ecommerce and payments platform, and Trane technologies, a leading provider of heating, ventilation and air conditioning (HVAC) solutions,” Royal London’s Crowdy adds.

    Heap and Benavides echoed similar remarks from Nordic asset managers about the negative headwinds experienced by the renewable energy sector. “The environmental theme was under renewed pressure in 2023. The s fund saw clean energy trading at all-time lows going back to early 2000 – mainly as a result of higher interest rates. In contrast, our BNPP Ecosystem Restoration benefitted from positive performance of listed, defensive infrastructure companies exposed to waste and water services that have inflation-linked revenue exposure,” they explained.

    While an extensive treatment of the detailed drivers of all of the BNP Paribas’ Article 9 funds is beyond the scope of this article, two stock featured more than once in the top 5 of the asset manager’s funds.

    Holdings in Danish renewable energy company, Ørsted, was a detractor to the performance of the BNP Paribas Energy Transition, Climate Impact and Global Environment funds.  Heap and Benavides note that “due to rising bond yields, and supply chain – or project cost – inflation, questions have been asked about the shareholder value creation of Ørsted’s US projects, due a recent impairment and where management are close to making a final investment decision. These offshore wind sector headwinds are likely to persist for the next 12-18 months, but the company is nevertheless well positioned to benefit in next 3-5 years from more auctions and substantial growth opportunities.”

    Meanwhile, holdings in American water treatment and efficiency company Pentair was said to have to contributed to the performance of the BNP Paribas Aqua and Global Environment funds. “The company advanced in 2023, following a challenging 2022 in which concerns around slowing US residential activity caused the share price to decline. Pentair recovered thanks to favourable earnings announcements, above consensus expectations and upgrades in full year guidance. While top line headwinds persisted in 2023, the management’s focus on execution (pricing and integration) appears to be ramping up,” Heap and Benavides argue.

    Fixed Income Funds Performance

    Among article 9 fixed-income global funds from non-Nordic partner managers registered in the Nordics, NordSIP was able to receive feedback from the portfolio managers of Royal London’s RL Global Sustainable Credit Fund, the responsAbility Impact – Transition to Net Zero Fund and the BNP Paribas Funds Green Bond Fund.

    Whilst the RL Global Sustainable Credit fund was the only one out of these three that provided positive relative returns for the second half of 2023, on a yearly basis both the RL Global Sustainable Credit fund and the responsAbility Impact – Transition to Net Zero Fund provided positive returns. However, as is often the case with fixed income funds, the heterogeneity of benchmarks can shed some light on the relative performance of the funds.


    The BNP Paribas Funds Green Bond fund tracks the Bloomberg Barclays MSCI Global Green Bond Index Euro Hedged index, which provided better returns than the benchmark of the other two funds.

    This fact notwithstanding, the second half proved more fortuitous for these fixed-income funds, and allowed an improvement in performance vis-à-vis the first six months of 2023.

    Bond Market Headwinds

    Given the nature of their markets, fixed-income portfolio managers took a keener interest in the interest rate environment and the movements of the yield curve.

    “After an aggressive pace of monetary policy tightening in the second half of 2022 to tackle inflation that was ‘broad-based and unacceptably high’, in 2023 the US Federal Reserve decided on rate rises in occasional steps by 100bps in 2023, with a 525bps hike since the first hike in March 2022. The European Central Bank (ECB) first raised its three key rates by 50bp in February and March, and then by 25bps in May, June, July and September, taking the deposit rate to 4.00%. Since the first hike in July 2022, rates have risen by 450bps,” Nicholas Frank, Investment Specialist, Global Fixed Income at BNP Paribas AM, says discussing the performance of BNP Paribas Green Bond fund.

    Jeremy Sitruk, Fund Manager at responsAbility

    “The second half of 2023 was characterized by significant shifts in risk-free rates, highlighted by a sharp rise in the 10-year US Treasury yields. This period saw a pivot from earlier themes, primarily due to the shifting dynamics of global financial markets. This contributed to attractive total returns for corporate bonds in 2023.
    Additionally, the sustainability landscape saw growth as more corporations reported on carbon emissions and committed to reductions, expanding the eligible investment universe for sustainable investments,” Jeremy Sitruk, responsAbility Impact Transition to Net Zero Fund, tells NordSIP.

    “Throughout the year, changes in monetary policy expectations led to a sharp rise in volatility all along the yield curve, and especially on the shorter maturities. These movements were exacerbated in mid-March by the bankruptcies of several US regional banks. The upward pressure on bond yields increased and, on 23 October, the yield on the US 10-year US T-note briefly surpassed the symbolic threshold of 5.00% for the first time since 2007,” Paribas AM’s Frank agrees.

    “The European Central Bank (ECB) first raised its three key rates by 50bp in February and March, and then by 25bps in May, June, July and September, taking the deposit rate to 4.00%. Since the first hike in July 2022, rates have risen by 450bps. Eurozone bond markets’ movements were driven by expectations of the ECB’s and the Fed’s monetary policy and, of course, by the banking turmoil that arose in March, first in the US and then in Europe. In the first quarter, the yield on the 10-year German Bund moved erratically between 2.00% and 2.75%. Market movements were several times heightened by the reaction of some investors who felt forced to abruptly stop-loss their positions,” BNP Paribas AM’s Frank continues.

    “In this context we have increased the modified duration of our Green bond portfolio relatively to the benchmark in several times in the year. We started 2023 being shorter than the reference of around 75 bps and reached 10 bps of longer than the index duration by September. This was helpful to capture a good performance during the bond rally happening end of the year,” BNP Paribas AM’s Frank explains.

    Strategic Positioning

    Discussing their approach to sustainable fixed income markets, Sitruk and Frank highlighted the relevance of credit ratings, the real estate sectors and issuers linked to the swap curve.

    “Our fund’s performance during this volatile period can be attributed to a disciplined bottom-up selection process. By maintaining our top-down portfolio characteristics closely aligned with the benchmark, focusing on duration and credit exposure, we were able to navigate the market effectively. Notably, our investments in BB credits that were upgraded to Investment Grade (rising stars) and our strategic positions in the real estate sector were pivotal in driving our fund’s performance, especially as risk premiums in this sector became particularly attractive,” Jeremy Sitruk, responsAbility Impact Transition to Net Zero Fund, tells NordSIP.

    According to Frank, BNP Paribas AM focused on issuers linked to the swap curve (such as multilateral banks, agencies and covered bonds, including the European Union) “to benefit from a widening of swap spread (government bond yield have increased against the swap rates).”

    The Way Forward

    Looking ahead to 2024, BNP Paribas AM’s Frank is focusing on duration. “In 2024, we will envision to continue overweighting the modified duration of the portfolio since Central Banks should become more accommodative. In the short-term, fixed income market are still a bit expensive with a curve inversion, aggressive expectations of rate cuts that could disappoint markets if policy makers are not so fast to adapt to the new disinflationary context, and because of massive issuances at beginning of the year. The situation is rather asymmetrical, but in case of market corrections we will increase slightly our duration to become longer than our reference,” Frank explains.

    “Another tactical move in the portfolio is also to be long if the euro zone and short US in duration. Indeed, we expect a significant gap between the GDP growth, USA being more resilient while eurozone having at least two quarters of zero growth ahead. This was most visible in the second half of the year. At the start of the year, many investors expected global interest rates to start to decrease in early 2024 if not before. This supported equity markets, as lower rates are generally thought to be supportive for equity markets,” Frank concludes.

    Image courtesy of Nordsip
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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