A bet on ESG criteria and a rush among Japanese investors to own foreign stocks, particularly in the technology space, has proved to be a winning combination for a domestic fund managed by Morgan Stanley Investment Management.
Launched in Japan last month, the Global ESG High Quality Growth Equity Fund, run by the U.S. asset manager and owned by Japan’s Asset Management One Co., has raised an initial amount of ¥383 billion ($3.6 billion), the most for a new offering in Japan in 20 years, according to data compiled by Bloomberg. That also makes for the second-biggest launch ever among all stock funds in the nation, behind the Nomura Japan Equity Strategy Fund, which back in 2000 had an initial value of ¥792.5 billion.
The new offering adopts a similar strategy to Morgan Stanley’s $15.6 billion tech-heavy Global Opportunity Fund, with eight of their 10 biggest holdings being the same. The top four stocks — Amazon.com Inc., TAL Education Group, Mastercard Inc. and ServiceNow Inc. — account for about 30 percent of the portfolio for each fund.
"We want to have a good impact but also get the best returns for our shareholders,” Kristian Heugh, the manager of the fund at Morgan Stanley, said in an interview. "ESG is absolutely critical for the market to look at, for companies to look at, but we want to make sure that people don’t get too far in one direction or another because otherwise it’s not going to work,” Heugh said, referring to environmental, social and governance criteria.
The coronavirus pandemic has driven a global push toward sustainable investing, with increased focus on factors such as health and climate change spurring corporations to adopt higher ESG standards. Bank of America said last month that flows into ESG strategies in 2020 were four times greater than in 2019 on a year-to-date basis.
Heugh’s team ranks stocks based on the firm’s internal scoring system, which takes into account the "qualitative aspects” of businesses in measuring a company’s performance, categorizing them into gold, silver and bronze ratings. Amazon.com, for example, has a silver rating.
E-commerce companies like Amazon.com have "some very positive impacts” to society by reducing cost and carbon footprint through its web-based services, according to Heugh.
The virus outbreak has seen retail investors around the world piling into shares of companies linked to technology and data-driven businesses. These stocks, along with health-care names, have been at the forefront of the rebound in global equities from their March lows.
The new fund has about 44 percent of its assets in information technology shares, according to its factsheet. That’s versus almost 35 percent for the Global Opportunity Fund, which has beaten 98 percent of its peers over the past one month.
Japan has "one of the largest home-market biases in the world,” Heugh said. "It’s been very impressive to see that mindset change.”