August gross returns
$ORFN -0.01%
SPY -4.08%
QQQ -5.13%
ESGU -4.03%
ESGV -4.33%
NULV -3.02%
IWS -3.13%

The August recap: Energy had a resurgence. Utilities did ok. Industrials weighed on the ESG Orphans. Alcohol was heavy with DEO -7.84% and BUD -9.68% (combined ESG Orphans weight 7.23%) dragging the Index down. Those two accounted for approximately -62bps to the ESG Orphans in August. They were sold post earnings in late July following a decent run up in front of those reports. Technically BUD does not look too encouraging currently.

We were pleased to see $ORFN outpacing the Blackrock and Vanguard ESG funds by more than 400bps and the Nuveen ESG fund by over 300bps respectively in August. It outperformed SPY and QQQ by 407bps and 512bps respectively. Our plan seems to be slowly starting to play out.

News Flows Support ESG Orphans Migration

News is moving in favor of the ESG Orphans. Florida’s Governor DeSantis proclaimed that Florida pension funds will no longer be mandated by ESG guidelines. Now they will be seeking returns for the sake of returns, pecuniary interests, and not altruistic pursuits.

We saw 19 state Attorneys General pushback against Blackrock and force them to disclose their ESG processes with regard to ties to China as well as generally prioritizing its fiduciary responsibility.
This is part of our broader thesis starting to play out.

We continue to see more launches of ESG funds along with taxonomy games being played. Several ETF providers are changing names of their funds to try and avoid “Greenwashing.” To us, this is more of the same of digging in heels and keeping the cottage industry alive on Wall Street. This exacerbates confusion.

23% of ESG funds were stripped of the “ESG” label in the EU as sustainable funds come under the microscope. Again this is to try and get ahead of the “Greenwashing” claims.

Pushback Has Begun, ESG Funds Contribute to Inflation, Provide No Differentiation

Net/net, we are seeing more pushback, more ducking and moving around transparency. Investors continue to be misled and duped. Macro risks are obvious in the form of global energy and food insecurity. How are your grocery bills? How are your food bills? Seeing, “Inflation tax” added on to your bills? Make no mistake, this is because of how ESG has imposed capital constraints and misallocated capital to various industries in favor of other, clearly essential industries. This is supply shock.

Yet the proponents of ESG continue to push the narrative and try and accumulate investment assets. As this occurs, these new launches buy the same stocks. They have a deeper focus on tech so that these ETFs tend to correlate heavily towards the SPX and QQQ. Look at the above performances of Blackrock and Vanguard flagship ESG funds and the performance between the SPY and the QQQ. There is no differentiation.

ESGV and ESGU have a beta of 1 to the SPX. This is what we call “SPX in drag.” You own the SPY and under the guise of ESG. Our research shows failed ESG objectives for weak returns. That’s the ruse. ESG investors are being misled.

ESG Orphans have a beta to the SPX of 0.82. ESGV and ESGU have a beta to the SPX close to 1.0.  The 2yr correlation to the SPX is 0.66. ESGU and ESGV have a correlation closer to 0.99. There is next to zero differentiation between ESGU, ESGV, and the SPX. There is much more significant dispersion to the SPX in the ESG Orphans. Recently the ESG Orphans have been outperforming current ESG funds.

Fed Meddles, Orphans Shrug

The Fed has told us that they are proceeding with a hawkish bias for now as they look to combat inflation. Some market participants are banking on a Fed “pivot” going forward. The thought process wrestles concerns between inflation and a slowdown in growth. Will they turn dovish? The price action in the market suggests this may not be the case. In addition, several Fed governors have hinted that they are concerned about runaway inflation. Some of the cynics say if Neel Kashkari is turning hawkish, that’s a real hawk signal as he is usually a dove.

We are not so focused on the Fed, as it has less influence on the ESG Orphans’ theme. Our macro lens points to a market still struggling with the exhaustion from a prolonged bull market that accelerated post-Covid when the market was flooded with money. The hangover persists.

We are focused on the behavior of the Orphans and the pushback against ESG that will continue to buttress the ESG Orphans Index. In the end, this is about flows from a bloated area (ESG) to a much lesser, more maligned, smaller section of the market excluded for the past decade (anti-ESG, the ESG Orphans.)

Please feel free to reach out to us for one-on-one calls to discuss the developing opportunities in the ESG Orphans and to learn more about our process and the deep-dive research into our thesis.

Thank you for your continued support of $ORFN and the ESG Orphans.

Mark Neuman, CFA