The rates paradigm shifted. Quantitative Easing and Zero Interest Rate Policy programs ended. The cost of money increased. This was the biggest impact to markets in 2022. We expect more of the same in 2023.

Here is my recap of 2022 and the outlook for 2023. “Anti-ESG” is now a theme and should be a center topic of discussion in 2023. The ESG Orphans and $ORFN are ready for it. Are you?

We wish everyone the best of luck, health, happiness, and prosperity in 2023.

Monthly Report

 The Bear Market Growls 

Happy New Year! What a year for the markets. This was the first year in a long while where stocks struggled. Bearish market action has been a rarity since the Global Financial Crisis. This was the first-of-its-kind in nearly a decade. 

Markets don’t go up forever. The end of money supply expansion, aka “quantitative easing” (QE) and zero interest rate policy programs wreaked havoc on the markets. A year ago, the 2-year yield was 0.75%. Today it is 4.20%. The 10-year yield was 1.75% a year ago, and today it is 3.80%. This increase in the cost of money has impacted markets far and wide in 2022. We expect the impact of higher rates to be felt in 2023. 

In this recap, we’ll discuss how markets fared in 2022 (not great for assets in general), what that means as we look out to 2023, and the emergence of “anti-ESG” (Environmental, Social, and Governance investing) as a theme and how it is impacting the economy and the ESG Orphans. 

How ESG Navigated 2022, Underlying Thesis 

The ESG Orphans isolated the ESG factor. Unlike other supposed “anti-ESG” funds which focus on an aspect of ESG within their sectors, the ESG Orphans are unique as they isolate the entire ESG investing universe by focusing on the exclusions. These sectors were maligned and suffered from malinvestment and misallocation of capital for a decade and became high expected return securities as a result. 

After a long period of easy money as rates fell to near zero thanks to an accommodating Fed, the sharp move higher in rates last year exposed the investing landscape distortions that ESG created. Higher rates accelerated the unveiling. The misallocation of capital from the ESG movement was seen in many investment areas. 

In 2022, many investors were herded into “ESG” names by ESG investment-based ideologies that abandoned traditional investing metrics. When the shine wore off, obvious investment mistakes became more apparent as rates went higher. Investors and corporations felt the impact. The ESG Orphans outperformed in 2022 because they had been maligned for so long, were uncrowded, and became high expected return securities. In addition, a lot of these orphaned companies were not subject to the extra regulatory and social pressure-forced compliance required by so many irrational due diligence questionnaires. In the end, ESG investors were misled with higher fees, lower returns, and failed objectives. 

Our thesis was developed over several years leading up to 2022. We did thousands of hours of CFA charter holder rigor-induced deep dive into all things ESG. We consulted with experts like NYU’s “Dean of Valuation,” Professor Aswath Damodaran. We talked with renowned energy expert Dr. Anas Alhajji about ESG’s impact on energy, especially in fossil fuel and nuclear energy. We leaned on hedge fund legend Cliff Asness’ white paper on ESG as an initial jumping off point. Over time, we investigated the rating agencies, conducted top down and bottom up quantitative and qualitative research on the entire industry from all the funds to all the stocks in the ESG universe. We spoke with ESG “experts” and company ESG officers alike. We left no ESG stone unturned. 

First Year, The Numbers, and Looking Forward 

2022 marked the launch of our ETF. We believe we are in the early stages in an ESG repricing, a reversion of flows back towards the areas that have been excluded from investing for altruistic reasons. From a fundamental perspective, we believe our Orphans remain fairly priced relative to most things. Some would say they are “cheap” versus the overall market. Many are vital industries that will be needed going forward. Whatever the future looks like, our ESG Orphans will be part of that landscape. We can’t get to future energy without present energy. Weapons will be vital in a growing belligerent world. Alcohol and tobacco continue to be inelastic goods that are present in both good and bad times. 

We separated emotion from investing by finding these high-expected returns excluded from the ESG bubble, which is slowly bursting. Higher interest rates and the heightened cost of money have made profits and profitability matter again. We created the ESG Orphans to help investors assuage the risk that ESG has wrought in the markets. 

The Returns 

Now let’s dig into some numbers. We’ll look at the Index we created as well as the tracking stock that mirrors the Index. First, looking at our ESG Orphans Index, the 2022 returns were incredible. The ESG Orphans Index returned over 20% in 2022. 

Let’s compare: 

SPX 500 -19.95% 

NDX 100 -33.89% 

Russell 2k -22.50% 

FTSE All Cap Choice -18.70% (Vanguard ESG Benchmark Index) 

ESG Orphans Index +20.65% 

Note: Indices cannot be directly invested in. See Notes below. 

The ESG Orphans Index outperformed by 40-50%, depending on where you look. This is THE definition and anticipated result of “high-expected return” stocks. They are labeled as such because nobody owns them. 

For those looking for some research into the Index, here is a link to our calculation agent Solactive’s daily update of our Orphans Index: 

Let’s drill down to the ESG Orphans Index ETF ($ORFN) since its launch on May 18, 2022, and compare it to a few others: 

Cumulative Returns Since Inception Date 5/18/2022, through 2022 year-end: 

$ORFN +7.25% 

SPX Index -2.14% 

NDX 100 Index -8.3% 

Russell 2k Index -0.85% 

FTSE All Cap Choice Index -2.23% 

To view standardized performance and fund holdings for ORFN, click here

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (800) 794-1485

As with the Index, the tracking stock $ORFN is doing exactly as we had planned and hoped. It’s outperforming many indices including each of the major ones shown here. We believe this will continue in 2023. 

ESG investing misled investors with false promises and distorted the investing landscape by misallocating capital. The ill effects crushed 2022 returns. It’s what we expected and why we created the ESG Orphans Index consisting of the exclusions of the past decade’s ESG bubble: Fossil fuel, nuclear energy, weapons, alcohol, tobacco, and gambling. 

Some Thoughts on Why It’s Working 

The ESG Orphans were created to help investors manage risk and capitalize on investment opportunities we envisioned. The reversion of ESG flows and the unwind have just begun. Our early investors have benefited tremendously from our thesis. There’s still plenty of time and opportunity as the push and pull back and forth in the ESG circles continues. 

The ESG industry with the AUM in the multi-trillions and the fees/commissions generated in the billions continues to dig in their heels and fight the newly emerging trend. All the costs, regulations, and compliance at the fund level and corporate operational level are starting to eat into profitability. 

At the political level, the pushback against ESG continues. This includes focus at the State Attorneys General level towards Blackrock and their misallocation of pension fund and retirement fund assets. Now that returns have suffered and investors realize they are not getting what they paid for, politicians are starting to fight back. We’ve seen fiduciary duties abandoned on so many levels in favor of asset gathering and fee collecting. The pendulum is swinging, and the direction is slowly moving towards anti-ESG. 

ESG Confusion in Weapons’ Manufacturers, Advantage Orphans 

Consider what recently happened with the year-end budget allocation to Ukraine. This sums up the false pretense and irony in ESG. Ukraine was awarded $47 billion in funds (on top of the nearly $50 billion they have already been allocated.) Ukraine turns around and buys weapons from US-makers like Raytheon (RTX, 6.15% of ORFN), Lockheed Martin (LMT, 5.49% of ORFN), Northrop Grumman (NOC, 3.3% of ORFN), Boeing (BA, 4.6% of ORFN), and General Dynamics (GD, 2.49% of ORFN). These are all ESG Orphans that comprise 21% of the ESG Orphans Index and ETF. (As of 12/31/2022.) 

ESG funds heretofore have not been allowed to invest in weapons’ manufacturers as they were determined to be ESG villains. Our research showed this sector was part of the ESG exclusions and thus became a key part of our ESG Orphans (anti-ESG) strategy. RTX returned over 17% in 2022. NOC returned nearly 41%. LMT returned nearly 37%. 

Are weapons in 2023 going to be OK with ESG investors? Ukraine is an ongoing conflict. China/Taiwan is on everyone’s radar too. The world’s bellicosity is increasing. We are not warmongers at Constrained Capital. We are investors looking for the greatest returns per unit of risk, irrespective of the peer pressure, social mores, and “woke” influences. 

What About Energy (Fossil Fuel and Nuclear?) 

The continued misallocation of capital and malinvestment around all forms of energy will keep energy crises at the center of most discussions. Bureaucrats have hijacked the discussion from engineers. For too long, money has been the solution rather than simple math and logical engineering. Russia took early advantage of capital constraints imposed by the EU’s energy policies, especially around Germany’s nuclear posture. Energy insecurity is not going away anytime soon. 

We’ve seen similar ill effects in the US with issues around the electricity grid. The US push towards EVs again seems more about societal pressures and less about energy freedom and optimal use of existing energies. We continue to feel that we will not be able to get to any sustainable future energy without the maximization of current energy. This includes continued use and development of fossil fuel and nuclear energy. These are more vital than anything else. We have 50% of our ESG Orphans in fossil fuel and nuclear energy. Energy’s outperformance of everything contributed to the ESG Orphans’ outperformance. 

Nuclear utilities had a mixed year. The second half of the year saw that space struggle as the impact of higher rates were finally felt and names in that sector traded heavily. But this is part of the diversity in our basket’s composition. 

Alcohol, Tobacco, Gambling 

The alcohol and tobacco sectors in the Orphans (approximately 25% combined weighting) provided some stability and income to the overall ESG Orphans in 2022. Altria (MO, 3.55% of ORFN) was down 3.5% but it paid out over 8% in dividends. Philip Morris (PM, 6.42% of ORFN) was up 6.5% and paid 5% in dividends. British Tobacco (BTI, 3.66% of ORFN) was up 7% and paid 8.6% in dividends. 

At Constrained Capital, we feel Coke and Pepsi and Mondelez (all ESG darlings) impact society more negatively than tobacco does. In fact, we did research that shows the societal impacts/costs from obesity and type-II diabetes cost the US 40% more than the impacts/ills from smoking, according to the CDC. Our kids’ school vending machines are filled with Coke/Pepsi products. We refuse to mix emotions and peer pressure with better risk-adjusted investment returns. Studies show inelastic goods makers can withstand economic uncertainty better than producers of elastic goods. We like the dividends and product inelastic nature provided by tobacco companies. They also happen to be very well-run ESG companies, beyond the product itself. They will likely lead the charge in finding less harmful user solutions to their products over time. 

The big alcohol companies in the ESG Orphans, including Diageo (DEO, -19%, 3.94% of ORFN), Constellation Brands (STZ, -7%, 1.32% of ORFN), and Anheuser Busch (BUD, -1%, 4.11% of ORFN) were drags on the performance of ESG Orphans, but they offered portfolio diversification and more inelasticity of goods in an inflationary environment. Again, this is an example where a sector of our basket provides non-correlated diversification. 

The gambling component of the ESG Orphans is a mere 4% as the Index is a market capitalization weighted. The entire gambling industry is smaller than all of Exxon Mobil, for reference. But as a rules-based index, the gambling sector does fall under ESG capital constraints. The stocks in this sector were quite mixed with some down 50% Caesars (CZR, 0.32% of ORFN), while another was up 27% Las Vegas Sands (LVS, 0.56% of ORFN). 

Overall Review, Outlook 

Overall, the performance of the ESG Orphans Index (+20.6% in 2022) and the ETF $ORFN (+7.6% total return since 5/17/2022, annualizing over 20%) is incredibly encouraging. Investors looking for non-correlated, uncrowded places to invest should consider an allocation to this product in their portfolios. 

Everyone from retail to retirement accounts and all those in between have been shepherded into ESG funds for the past 5-10 years. The unwinding of this misguided investment theme has just begun as crowds continue to sell their biggest holdings. This includes large-cap tech… We can see how badly Amazon (AMZN, -50%), Tesla (TSLA, -65%), Google (GOOGL, -39%), Apple (AAPL, -27%), and Microsoft (MSFT, -29%) did in 2022. This is because nearly everyone owns these stocks. Every ESG fund that launched in the past few years bought some or all these stocks. That’s why the top 5 holdings at SPY, QQQ, and ESGU/ESGV (Blackrock’s/Vanguard’s respective ESG flagship funds) look identical. They certainly fail the “ESG” guidelines on some or all aspects of “ESG.” Amazon, a company with the world’s largest carbon footprint outside of the energy industry, is surely not as ESG-friendly as it purports to be. 

This overcrowded aspect of ESG and Big Tech will continue to weigh on the markets. Sure, there may be an “oversold” bounce in these names after the bludgeoning that occurred in 2022. But make no mistake, the bubble that blew for the decade through 2021 will not likely be deflated in just 1 year. 

There are some who believe that the Fed may pivot if things deteriorate further from here. The Fed may ease rates. While we at Constrained don’t believe they will, we highlight to everyone that between 2000 and 2002 the Fed Funds rate fell from 6% to 2% while the SPX fell from 1500 to 800. Those rate cuts were panic-like on the back of a bubble implosion that built up for the 1990s. This is not dissimilar to what we have seen. Big tech again is at center stage. 

2023 Market Outlook, ESG Orphans Should Have an Allocation 

I want to close out the “Year in Review” document from Constrained Capital with my 10 points to watch for. Note: These are all opinions based on research and market observations. Here goes: 

  1. Stagflation. Everyone has talked about “recession.” I see stubbornly high prices and low growth. 
  2. New rates’ paradigm further wreaks havoc. The 2yy went from 0.75% on 01/01/2022 and is now 4.2%. That mattered and will matter. Investing mistakes at all levels now costs much more. 
  3. Past bubble unwind continues. The rate spike blew up Non Fungible Tokens (NFTs,) Special Purpose Acquisition Corporations (SPACs), and crypto. ESG is next. A pricing reset has begun and will continue. Money flow reversion will follow. 
  4. Overcrowded names suffer again. Big cap tech, MSFT, AAPL, GOOGL, AMZN are too crowded from SPY, QQQ, ESGU, ESGV, retail. Tech underperforms AGAIN in 2023. Rate cuts won’t help. 
  5. Earnings’ recession. Everyone sees an economic recession. Too few see higher inflation, lower margins, greater input costs and company profits reduced considerably. BLS’ data seems flawed. Layoffs could assuage some EPS’ pressure, but it seems that Wall Street EPS’ outlooks are too rosy. 
  6. The energy crisis deepens. Foolhardy ESG misallocation of capital, malinvestment starved traditional fuel sources. The energy crunch will be exacerbated. Bureaucrats deciding policy instead of engineers is/was silly. Damage has been done. The fix will take time. 
  7. Value > growth. Rates’ landscape shift means sharpen the pencils, stock picking over passive index buying. Buy and hold won’t work. 
  8. Under crowded names that nobody owns will outperform. The ESG Orphans were hated, excluded for a decade. Nobody owns them. The ESG masses own big cap tech, not fossil fuel, nuclear energy, weapons, alcohol, tobacco. 
  9. ESG unwind continues. ESG investor losses abound. Blackrock remains under fire for failed fiduciary duty. The ESG easy money boondoggle is over. Higher fees, lower returns, failed objectives caused investing damage and distress. 
  10. Value, smaller cap, commodities, and international are favored factors. Anti-ESG becomes mainstream. 

2022 provided some fertile grounds for our thesis to play out. Returns were commensurate with our expectations. We expect this to continue over the next 3-5 years. The amount of build up that buttressed the false pretenses of ESG was extensive. Easy money blew the bubble orders of magnitude bigger than any bubble we have seen in the past. The new rates’ paradigm in place means that the unwind and reversion from ESG will continue over time. 

Please don’t hesitate to reach out to set up a call to discuss any or all of the above in greater detail. Countless hours of research, investigation, and analysis have gone into this generational investment opportunity for the astute investor. 

Follow us at: @MarkNeuman18 @ESGOrphan Find more information at: (Index site) (ETF site) 

Reach out to us at: 

We wish everyone the best of luck, health, happiness, and prosperity in 2023. 


Mark Neuman, CFA Constrained Capital Founder & CIO 917 658 9369 

Twitter: @ESGOrphan @MarkNeuman18

Mark Neuman is registered with Foreside Fund Services, LLC which is not affiliated with Constrained Capital or its affiliates. 

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. To view this and other information about the Fund, click to read the prospectus or the summary prospectus. Read the prospectus or summary prospectus carefully before investing. 

References to other securities is not an offer to buy or sell. 

Because the Fund is an ETF (rather than a mutual fund), shares are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemable. Owners of shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Unit aggregations only. Brokerage commissions will reduce returns. 

Diversification in an individual’s investment portfolio does not assure a profit. 

American Depositary Receipt Risk (ADR). ADRs involve risks like those associated with investments in foreign securities, including changes in political or economic conditions of other countries and changes in the exchange rates of foreign currencies. ADRs listed on U.S. exchanges are issued by banks or trust companies and entitle the holder to all dividends and capital gains paid out on the underlying foreign shares. Investing in ADRs as a substitute for an investment directly in the foreign company shares, exposes the Fund to the risk that the ADRs may not provide a return that corresponds precisely with that of the foreign company’s shares. Concentration Risk. Because the Fund’s investments will be concentrated in a group of industries, to the extent the Index is concentrated, the value of its shares may rise and fall more than the value of shares in a fund invested in a broader range of industries. ESG Orphan Risk. A strategy or emphasis on environmental, social and governance factors (“ESG”) orphaned industries, such as fossil fuel energy, nuclear power, tobacco, weapons/firearms, alcohol and/or gambling, may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG Orphaned industry focus or limitation. New Fund Risk. The Fund is recently organized with no operating history and managed by an Adviser that has not previously managed a registered fund. As such, the Fund has no track record on which to base investment decisions. Non-Diversification Risk. Because the Fund is “non-diversified,” it may invest a greater percentage of its assets in securities of a single issuer or fewer issuers than a diversified fund, which may expose the Fund to the risks associated with the developments affecting the issuers in which the Fund invests. Passive Management Risk. The Fund is passively managed and attempts to mirror the composition and performance of the ESG Orphans Index. The Fund’s returns may not match due to expenses incurred by the Fund or lack of precise correlation with the index. 

The fund is distributed by Foreside Fund Services, LLC 


SPX 500 Index: “The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.” 

NDX 100 Index: “The Nasdaq-100 is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. 

Russell 2000 Index: “The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.” 

FTSE All Cap Choice Index: “The FTSE US All Cap Choice Index measures the performance of the FTSE USA All Cap Index after excluding companies involved in Vice Products (Adult Entertainment, Alcohol, Gambling, Tobacco), Non-Renewable Energy (Nuclear Power, Fossil Fuels), and Weapons (Civilian Firearms, Controversial Military Weapons, Conventional Military Weapons). Companies are also excluded based on Controversial Conduct and Diversity practices.” 

ESG Orphans Index: The Index is comprised of US-listed stocks and ADRs of companies whose primary business is in a sector or sub-sector that is commonly “orphaned”, discarded, or excluded by ESG-centric mutual funds and ETFs. 

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