RBC says buy these 12 socially responsible stocks that are beating the market amid the coronavirus turmoil - and can help protect portfolios from more chaos
- RBC strategist Sarah Mahaffy says companies that score high on ESG metrics have held up better than the rest of the market since the onset of the coronavirus sell-off.
- The result is that most ESG funds are beating their benchmarks this month.
- Mahaffy named a group of stocks popular with sustainable-investing hedge funds that can boast strong relative performance since the S&P 500 peaked on February 19.
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If you think follow the leader is an effective investing strategy, you might think about following big investors in ESG stocks and funds.
Sarah Mahaffy - a US equity strategist at RBC Capital Markets - says companies that score high on environmental, social, and governance metrics are holding up better than the rest of the market during the sell-off caused by the COVID-19 outbreak and the growing global lockdown.
"Companies with better overall ESG risk profiles have outperformed those with worse ESG risk profiles during the stock market drawdown," she wrote in a recent note to clients. "Two-thirds of actively managed sustainable equity funds are beating their benchmark in March."
Those stocks have been beating the broader market over the past few years, but it's taken a dramatic turn in early 2020. One reason is that ESG funds don't invest much in two groups of hard-hit stocks: Financials, which are suffering because of ultra-low interest rates, and energy companies, which have been crushed during the recent oil price war.
Another factor helping actively managed ESG funds succeed is their preference for companies that score well on traditional quality measurements, Mahaffy says.
"Relative to traditional funds, the holdings of sustainable funds tend to have a higher quality profile (higher Return on Equity, Return on Invested Capital, and Return on Assets on average)," she wrote.
But it also holds on the individual company level, and Mahaffy is telling investors how they can take a page from the playbook being used by the largest mega-investors on Wall Street.
It includes these 11 companies that are owned by large percentages of the sustainable stock hedge funds surveyed by RBC. Each has done better than the broader market since the S&P 500 peaked on February 19.
The stocks are ranked based in increasing order of that outperformance, which is based on closing prices from March 24.
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