Vanguard headlines hit to Australian sustainable product flows

Inflation, rising interest rates and fears of a recession have conspired to significantly erode fund flows into sustainable products, according to the latest analysis from Morningstar.

Morningstar’s Q2 review of global sustainable fund flows has painted a gloomy picture underscored by the fact that global sustainable funds attracted just US$18 billion in Q2 compared to over US$31 billion the previous quarter.

The research and ratings house attributed the decline to “sticky inflation, rising interest rates, and recession fears which it said continued to weigh on investor sentiment.

Australia was not immune to the trend, according to the analysis, with fund flows in Australia and New Zealand down US$1.7 billion.

The only bright spot for sustainable funds was Europe where Morningstar said that despite the challenging macro backdrop, sustainable funds garnered US$20 billion of net new money, although down from near US$34 billion in the previous quarter.

It noted that investors pulled US$635 million from U.S. sustainable funds, recovering slightly from $US5 billion-plus losses in the two previous quarters.

Looking at Australia and New Zealand the Morningstar analysis said the sustainable funds universe 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.”

“Significant outflows also occurred in its ethically conscious global aggregate bond hedged in NZD (US$390 million) and its ethically conscious Australian Shares strategy (US$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,” it said.

“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,” the Morningstar analysis said.

“Meanwhile, flows into Australasian active sustainable funds, while positive, were muted in the second quarter, with only USD 173 million in net new money.”