World’s best ESG fund trounces peers with a huge bet on crypto

THE world’s best-performing environmental, social and governance (ESG) fund of 2023 was built by Ark Investment Management and powered by a huge bet on crypto.

The US$2.4 billion Nikko AM Ark Positive Change Innovation Fund returned 68 per cent last year, more than double the gains delivered by the S&P 500. Its biggest holding was Coinbase Global, which makes up almost a tenth of the fund, according to data compiled by Bloomberg. The Nikko-Ark fund is registered as “promoting” ESG under European rules.

The outperformance caps a year in which investing in funds with ESG themes has faced major headwinds. More conventional clean-tech ESG assets such as wind and solar tanked as capital-intensive projects in those sectors were upended by higher interest rates. But ESG funds that opted for other corners of tech fared much better.

Last year’s 21 per cent slump in the S&P Global Clean Energy Index coincided with an almost fivefold surge in the market value of Coinbase, the largest United States crypto exchange. Crypto enthusiasts then started 2024 on a high after the US Securities and Exchange Commission (SEC) moved ahead with its hotly anticipated approval of a number of Bitcoin exchange-traded funds. (Those Bitcoin gains have since evaporated in what some analysts say is a classic case of “buy the rumour, sell the fact”.)

Thomas Hartmann-Boyce, a portfolio manager at Ark, said the SEC approval gives Coinbase shares “major room to run”, thanks to its position as “the leading custodian for those underlying Bitcoin assets”.

Coinbase “is certainly our highest conviction name that falls within the digital assets category”, he said.

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The fund gets a model portfolio from Ark Investment Management, which was founded by Cathie Wood. It is then analysed and implemented by Nikko Asset Management. Investments are in disruptive technologies that align with the United Nations sustainable development goals, according to Hartmann-Boyce. He acknowledges that Bitcoin consumes a lot of energy to mine, but says the fund’s sustainability rationale relates to the transparency around transactions, and the provision of financial services to the underbanked.

Overall, ESG funds that dodged more traditional green assets and instead went all-in on tech outperformed last year. Among the top performers was JPMorgan US Technology Fund, which delivered almost 65 per cent to its investors. The fund, like the Nikko Ark portfolio, is registered as “promoting” ESG, a category that’s formally known as Article 8 under the European Union’s Sustainable Finance Disclosure Regulation.

Hartmann-Boyce said Ark targets a compound annual rate of return of at least 15 per cent over the next five years for its high-conviction public equities, which include Coinbase, CRISPR Therapeutics, Block and Pacific Biosciences of California.

Investors in the fund are no strangers to volatility, with 2023’s huge gains following a slump of more than 50 per cent in 2022, according to data compiled by Bloomberg. And so far this year, Coinbase is down about 25 per cent. Of the 28 Coinbase analysts monitored by Bloomberg, 10 recommend selling, while the average price target is about 7 per cent below its actual trading price.

Peter Graf, the chief investment officer for Nikko in the Americas, said the fund remains committed to its strategy and allocations, even against the backdrop of a volatile macroeconomic outlook and a rough start for tech stocks. “I’m looking to offer a long-term exposure” to sustainability-related innovation, he said.

“We wouldn’t want to characterise this as just purely a growth portfolio,” Graf said. “There’s also certainly a small-cap flavour; it’s really a bottom-up portfolio that happens to have a lot of correlation with growth. But on an individual company-by-company basis, the idea is that the new technologies – regardless of the business cycle – are going to work out.” BLOOMBERG