The seasonality of sustainable fund flows
It is high summer and while we enjoy our long days here in the Northern hemisphere, the days are definitely getting shorter, which is good news for sustainable investment funds. Meanwhile, in “the world’s second-best hemisphere” the days are getting longer which should be a headwind for sustainable funds.
If that sounds weird, hear me out. In the first half of this year, we had another crisis. And while in the spring of 2020 many advocates of sustainable investing promoted these funds as a safe haven in a crisis, I was always doubtful of that claim. As I explained back then, I think the outperformance of sustainable funds in spring 2020 was in my view due to the high exposure to tech stocks in these funds. Guess what, in the last six months tech stocks underperformed and so did sustainable investment funds. And strangely, no one is talking about sustainable funds as a safer alternative to conventional funds anymore.
However, the common perception of sustainable investment funds as “lower risk” (something that I believe is true to some extent) than conventional funds gives rise to seasonality in fund flows.
Five years ago, Mark Kamstra and his colleagues showed that fund flows are dependent on the mood of investors. They showed that by measuring the share of people who are suffering from depression and depression-like symptoms. As the days get shorter in autumn and winter, more people suffer from Seasonal Affective Disorder (SAD) and get what is sometimes referred to as the “winter blues”. Once days get longer in spring and summer, the share of people with depression declines indicating an overall better mood in society. Of course, in the southern hemisphere, that pattern is reversed which allows us to measure the impact seasonal changes in mood have on fund flows.
Average mood during a calendar year in the northern and southern hemisphere
Source: Fernandez-Perez et al. (2022). Note: OR measures onset and recovery rates of seasonal depression symptoms.
Funds that are perceived as less risky have higher inflows in times of rising SAD symptoms (i.e. declining mood). Funds that are perceived as riskier have higher inflows in times of declining SAD symptoms (i.e. improving mood).
That sustainable funds are perceived by investors as less risky than conventional funds can be seen by examining these seasonal flows as done by Adrian Fernandez-Perez and colleagues. They found that in the Northern hemisphere fund flows into sustainable funds increased as the days got shorter in autumn (i.e. August to November), while in the southern hemisphere, fund flows increased in the autumn of the Southern hemisphere, i.e. in February to May.
Clearly, these effects are small, but they provide an important insight for fund managers. Because sustainable funds are perceived as safer than conventional funds in some fuzzy, unspecified way, fund managers should put more emphasis on downside protection when managing these funds than when managing a conventional fund. That would likely help them attract and retain clients.