This week investors were reminded that the fate of some does not equal the possibilities of others. I am, somewhat cryptically, referring to US tech.
On Wednesday, Netflix shares plummeted as it announced lower new subscriber figures, a key performance indicator for the firm. Investors were panicked after the streaming giant lost subscribers for the first time in 10 years.
The likes of Baillie Gifford and a number of passive funds were adversely affected by the share price slump and it left questions as to whether this earnings season would be a brutal one for big tech.
Higher inflation and rising interest rates have derailed these high-growth stocks over the past six months and further misses could be disastrous.
But it was a somewhat different story on Thursday when Tesla, the world’s most valuable car company, defied sceptics.
The firm saw off rising prices to deliver better than expected first-quarter earnings. To be fair, investors’ expectations were low after the company missed car delivery forecasts earlier in the quarter while controversial chief Elon Musk had also warned on rising battery material costs, but it shows that investors can ill-afford to take a broad-brush approach to their stock picks.
The same is true in the funds space. One area that has had a meteoric rise to prominence in recent years is environmental, social and governance (ESG) portfolios. These have gained traction as investors want to do good with their cash.
It helps, of course, that these funds were swept up in the growth-stock wave of the past decade and avoided the worst of the value traps.
These funds do not tend to own unloved sectors such as oil, mining and financials as they are broadly viewed as unsustainable, instead focusing on tech and healthcare.
This strategy has been put to the test so far this year in a big way, with many of these funds struggling to make good on the promise of investing ethically while also making meaningful returns.
Indeed, just 38 funds with an responsible investing mandate have made a positive return this year. Yet investors ready to ditch their morals and turn to the dark side (or in this case, value) might be overreacting.
Digging under the surface, there are still some excellent options – five of which were highlighted by Eve Maddock-Jones in her article this week.
In the IA Global sector, 14 ethical funds remain in the top quartile over the first three months of 2022, although there were 43 that made bottom-quartile returns
Still, labelling ESG funds as a “failure” this year may be an assumption made in haste. Looking at the Trustnet team’s picks for this year, two of the six funds picked were ethical.
They currently sit in second and third place in the ranking year-to-date, suggesting that it has been equally challenging for non-ethical funds.
The conclusion here is not to get carried away with the overarching problems of sectors or fund groups. Yes, some big tech stocks will struggle, in the same way that some ESG funds will, but there will be exceptions. It is more important than ever to do your research and know exactly where your picks lie.