Sustainable funds globally attracted new net inflows of just $59 billion in 2023, a significant drop from the inflows of $166 billion the previous year, according to Morningstar’s latest Global Fund Flows.
Asia ex-Japan sustainable fund net inflows fell significantly from $7.2 billion in 2022 to just $3.3 billion in 2023, according to additional data provided by Morningstar.
Asian markets are fragmented in their embrace of environmental, social, and governance (ESG) principles, moving at a different pace and scale across the region and in comparison to their Western counterparts, according to Hortense Bioy, director of sustainability research at Morningstar.
Only three markets in the region saw net inflows for ESG funds.
“Taiwan, China, and Singapore are the three countries that drove the inflows into ESG funds in Asia last year, with a combined $4.8 billion of net new money,” Bioy told AsianInvestor.
Taiwanese ESG funds attracted more than $2.5 billion, boosted by the great performance of its technology sector.
Despite the country’s economic challenges last year, China, Asia ex-Japan’s largest ESG fund market, registered net inflows of $2.1 billion, supported by continued product development.
“Chinese investors tend to be the most speculative and find thematic funds, like those with a climate flavour, quite attractive. So much so that China has become the world’s second largest climate-focused fund market, behind Europe but ahead of the United States,” said Bioy.
ESG data availability and quality in the region has been a high obstacle to the broad incorporation of ESG factors in investment strategies for the researchers.
“Corporate disclosure regulations should help address the issue and, together with investment disclosure regulations, improve investor trust in ESG-focused investments,” she said.
ACTIVELY MANAGED FUNDS
Exploring the performance of actively managed funds in Asia, Samuel Lo, senior analyst of manager research at Morningstar, said that 2023 was a year of contrasts.
“Fund flows in the major cross-border markets in Asia such as Hong Kong, Singapore, and Taiwan throughout 2023 reflected the key trends in global markets, but also revealed specific developments in the region during the year,” Lo told AsianInvestor.
The stark contrast in investor sentiment towards Asia versus the main developed markets was especially telling, he said.
Asian bond funds, particularly high-yield options, experienced substantial outflows amid economic concerns in China, which is a significant segment the Asian bond universe.
"Notably, investors were dismayed by the protracted real estate turmoil, which culminated in the bond defaults by several high-profile property developers during the year,” said Lo.
As interest rates rose sharply, the allure of global bonds increased, drawing investors towards them for potentially higher returns.
“Equities saw a similar trend, with inflows to Asia ex-Japan equity ETFs countered by outflows from active funds. China's equity market struggled, leading to outflows from actively managed funds, though ETFs in the region did attract some investment,” he said.
There was a pronounced preference for developed markets, with the US market surging, fueled by AI (artificial intelligence) excitement and hopes for a gentle economic downturn, and Japan being notably favored, said Lo.
“Similarly, India equity funds also saw strong inflows, with the economy benefitting from strong consumer demand and industrial activities.”
ASIA REGULATORY INFLUENCE
Investor preferences in fixed-income funds have been swayed by regulatory factors, according to Lo.
Asian investors typically have a strong preference for income, which contributed to the previous appeal of Asia bond and Asian high-yield bond products, as they offered higher yields relative to global counterparts.
“However, following substantial interest rate hikes in major developed markets, the gap between the two has meaningfully reduced, which, along with the higher risks of Asian bonds as mentioned above, led to the rising attractiveness of global bonds versus Asian bonds,” said Lo.
In a similar vein, investors have also flocked to money market products or term deposits, which have lower investment risks but can still offer around a 4-5% yield.
“That said, investors should be mindful that these lower-risk, shorter-dated instruments present re-investment risks over the long run should interest rate falls again, and they lack the potential of capital growth over time.”