Morningstar - Q1 2023 - 44

10
Strategies
8.26
8.21
8
EXHIBIT 3
e TME Index
wth TME Index
Down Year for ESG The Morningstar
Sustainability Leaders index lagged
badly in 2022, as did many sustainable
investments.
Morningstar Global Markets Large Cap Index
Morningstar Global Markets Sustainability
Leaders Index
$12K
9.27
10
7.22
8
12/2022
6
12/2021
Source: Morningstar Direct. Data as of Dec. 31, 2022.
12/2022
8.19
7.40
10
8.82
8.21
8
7.29
7.09
6
12/2021
Source: Morningstar Direct. Data as of Dec. 31, 2022.
12/2022
EXHIBIT 4
12/2022
Tech Themes Take a Beating Thematic
indexes with heavy tech exposure saw
their fortunes turn in 2022.
6
12/2021
12/2022
Morningstar Exponential Technologies Index
Morningstar Global Digital Infra & Conn Index
Morningstar Global Food Innovation Index
Morningstar Global Markets Index
$12K
Love Themes, but They're Not Always a Breeze, "
Page 27.) Thematic investments possess
far more intuitive appeal than esoteric factor
strategies like " minimum volatility. "
A bull market has also helped. Consider the
performance of the Morningstar Exponential
Technologies Index, which includes 200
global stocks exposed to nine themes, including
cloud computing, healthcare innovation, and
robotics. For the five years through the end
of 2021, the index rose 171% in cumulative terms,
versus a 97% advance for its global equities
parent. But fortunes turned in 2022, as the index
fell more than 27% ( EXHIBIT 4). Another
thematic index, the Morningstar Global Digital
Infrastructure & Connectivity Index, is down
even more, declining 29% in 2022.
Thematic indexes that have less exposure to
technology have performed better. The
Morningstar Global Food Innovation Index fell
just 11.8%, well ahead of global equities.
indexes with five-year histories outperformed
their conventional equivalents.
$12K
Morningstar Exponential Technologies Index
Morningstar Global Digital Infra & Conn Index
Morningstar Global Food Innovation Index
Morningstar Global Markets Index
So, what happened in 2022? A growth bias hurt
sustainable equity funds, according to an
analysis by Morningstar's Jon Hale.3
companies handle ESG risks well. But in
late 2021, Morningstar research concluded that
10
" investors are paying too much for good ESG
companies. " 4
8
Too little energy exposure and too
much technology hurt the Sustainability
Leaders index in 2022, just as the opposite was
true in previous years.
What happens when the growth bias is removed
from a sustainable portfolio? The Morningstar
Global Sustainability Large-Mid Cap Value Index
lost only 10.6% in 2022, well ahead of the market.
The Morningstar Global Markets Sustainability
Dividend Yield Focus Index fared even
better in 2022. As we discussed, dividends
were a bright spot last year.
6
12/2021
12/2022
Morningstar Global Markets Index
Morningstar PitchBook Global Unicorn Index
$12K
8.82
8.21
7.29
7.09
Many growth
The value and dividend-screened sustainability
indexes reveal another important point
about sustainable investments. They're not a
monolith. Sustainable investments vary in
their motivations and applications. Each approach
has its own goals. Each has its own profile.
Morningstar Global Markets Index
Morningstar PitchBook Global Unicorn Index
$12K
10
9.49
8.21
At the end of the day, any investment that
deviates from the market portfolio will outperform
in some market conditions and underperform in
others. Just as the five years through 2021
undermined skeptics who dismiss sustainable
investing as requiring a performance sacrifice,
returns in 2022 showed that " doing good " doesn't
always lead to " doing well. "
8
6
12/2021
12/2022
Lesson 4: Growth Themes Don't Always Grow
Identify a trend and invest in its beneficiaries.
How can you lose? From cybersecurity to
connected cities to the blockchain, investments
focused on themes tripled their market share
in the decade that ended in 2021. (See " Investors
3 Hale, J. 2022. " Growth Bias Has Hurt Sustainable Equity Funds This Year. " Morningstar.com, Sept. 29.
4 Kelly, H. 2021. " What's the Cost of Buying Good ESG Companies? " Morningstar.com, Nov. 23.
10
44
Morningstar Q1 2023
8
9.49
8.21
The struggles of many thematic portfolios in 2022
illustrate the challenges inherent to the
approach. A successful thematic investment
must get three bets right:
1 Theme will materialize as expected.
2 Investable securities will benefit from the theme.
3 Beneficiaries will become good investments.
Consider some historical examples. China's
economic growth was a powerful theme
that did not translate into stock market gains.
China's gross domestic product grew from
$3.4 trillion in 2007 to more than $18 trillion
in 2022. Yet the Morningstar China Index gained
just 16.7% in cumulative terms for the 15-year
period through December 2022, while
the Morningstar Global Markets Index was
up 125.6% over that span.
In the late 1990s, the market identified an
important theme, as the internet changed the way
we all live and work. But successful internet
8.19
7.40

https://www.morningstar.com/articles/1115641/growth-bias-has-hurt-sustainable-equity-funds-this-year http://www.Morningstar.com https://www.morningstar.com/articles/1069245/whats-the-cost-of-buying-good-esg-companies http://www.Morningstar.com

Morningstar - Q1 2023

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