The broad stock market as measured by the S&P 500 rallied strongly in November, gaining 10.95%, recording the best monthly gain since April of the year and recovering from the back-to-back declines registered over the prior two months.
Sustainable small cap funds, which benefited from the small cap stock gains, delivered an average increase of 15.9% while returns across all small cap share classes ranged from 4.73% to a high of 27.8%. In line with value-oriented stocks, sustainable small cap value funds recorded an even higher average gain of 17.7%, with returns ranging from 11.5% to 22.5%.
The small cap value-oriented segment of funds is dominated by ten funds that account for 97.2% of assets and furthermore two funds, both managed by DFA, represent 69.4% of assets (reference Table 1). Also dominating the small cap value segment is an exclusionary approach to sustainable investing, followed by ESG Integration and ESG Integration-Consideration (reference Chart 1). The exclusionary approach is employed by four funds with $19.4 billion in assets, including three funds managed by DFA. In the case of DFA, the firm’s approach is an extension of its quantitative portfolio construction strategy in that the advisor “may also adjust the representation in the portfolio of an eligible company, or exclude a company, that the advisor believes to be negatively impacted by environmental, social or governance factors (including accounting practices and shareholder rights) to a greater degree relative to other issuers.” This differs from the common approach to exclusions by which companies or certain sectors are entirely excluded from portfolios based on specific ethical, religious, social or environmental guidelines. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling, sex related activities, the production of alcohol, tobacco, firearms, fossil fuels or even atomic energy. For purposes of classifying funds represented in Chart 1, DFA’s approach is included in the exclusions category.
Table 1: Top 10 Sustainable Small Cap Value Funds (by AUM)
Chart 1: Small Cap Value Funds Sustainable Investing Approaches
Sustainable investing Definitions/per SRA: ESG Integration-The fund will integrate ESG and may also consists of
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Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive. Prepared by: Sustainable Research and Analysis LLC.