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November 1, 2021

U.S. Fund Families Add New Responsible Investing Funds to Their Lineup in Q3 2021

by Tom Roseen.

The U.S fund business added 185 unique new funds (including ETFs but excluding share classes) in Q3 2021. And despite the popularity of passively managed funds, 143 of those funds were actively managed. Collectively, these new funds attracted some $7.4 billion in net inflows for Q3, with new actively managed funds (+$4.8 billion) outdrawing new passively managed funds (+$2.6 billion) for the quarter.

Perhaps more interesting given the recent focus on Responsible Investing (RI) fund trends—which includes funds with traditional socially responsible investing strategies, ESG investment strategies, impact investing strategies, and the like—fund families added 42 unique RI funds to their lineup. Of these, 29 were actively managed while 13 were passively managed. This was a significant jump in new RI fund launches over the prior two quarters (16 for Q1 and 23 for Q2).

And like their newly offered non-RI brethren, whose Q3 net fund flows into active (+$4.0 billion) and passive funds (+$2.4 billion) favored actively managed, actively managed RI funds attracted some $803 million, while their passively managed RI fund counterparts took in just $166 million for the quarter.

These new fund trends, however, do not match the flow patterns seen for all funds (which include the new fund flows cited above). In the table below, we see that actively managed funds, including money market funds, took in just $69.0 billion for Q3, while their passively managed counterparts attracted some $189.5 billion.

On the Responsible Investment side, we see similar flow trends with actively managed RI funds attracting some $6.3 billion, while their passively managed RI counterparts took $9.1 billion, despite actively managed RI fund assets under management (+$197.6 billion) outpacing the passively managed RI fund assets under management (+$135.5 billion) at quarter end.

Digging down a bit deeper into our macro-classification subgroups for RI funds, we note that estimated net flows into both domestic equity and world equity macro-groups favor the passively managed products, similar to the broader fund universe, with flows into both passively managed U.S. diversified equity funds (+$6.9 billion USDE) and developed international markets funds (+$2.2 billion), eclipsing those into the actively managed counterparts (+$2.2 billion and +$1.1 billion, respectively).

However, the stickiness of RI fund inflows, which we have cited several times before, breaks away from what we are seeing in the overall universe (which includes both RI and non-RI funds), where actively managed USDE funds continue to see net outflows, handing back some $45.2 billion in Q3, while their passively managed counterparts attracted a handsome $62.9 billion for the same period, highlighting investors’ overall continued interest in passively managed funds.

It is worth mentioning though that just three ETFs accounted for more than half of those broader-market passively managed inflows into USDE funds, with Vanguard 500 Index ETF (VOO, +$13.9 billion), SPDR S&P 500 ETF (SPY, +$11.8 billion), and Vanguard Total Stock Market Index ETF (VTI, +$11.5 billion) attracting the lion’s share of net new money for Q3. Meanwhile actively managed developed international markets funds (+$6.2 billion) attracted significantly less than their passively managed counterparts (+$46.3 billion).

Turning our attention back to RI funds, we note that similar to the broader universe of funds, actively managed RI mixed-assets funds (+$94 million), taxable fixed income funds (+$2.0 billion), and municipal debt funds (+$122 million) outdrew their passively managed counterparts, which took in $35 million, $743 million, and $0, respectively, for Q3.

So, on the responsible investment side of the ledger, investors are still more like to use actively managed funds. This makes intuitive sense, being that most of these funds take an active approach to securities selection, by using negative screening; best in class sustainable practice screens that focus on environmental, social, and governance practices, policies, and performance; and even focused social or environmental outcome practices, often referred to impact investing. All, generally, lend themselves to more active management, although rules-based and quantitative methodologies do allow for passively managed RI strategies.

For Q3, the primary individual attractors of investors’ assets on the responsible investment side of the equation were iShares ESG Aware MSCI USA ETF (ESGU, +$3.4 billion), Parnassus Core Equity Fund, Institutional Shares (PRILX, +$1.3 billion), iShares ESG Aware MSCI EAFE ETF (ESGD, +$827 million), Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (EMCR, +$474 million), and iShares MSCI USA ESG Select ETF (SUSA, +$385 million).

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