(Bloomberg) — The world’s best-performing ESG fund of 2023 was built by Ark Investment Management LLC and powered by a huge bet on crypto.
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The $2.4 billion Nikko AM Ark Positive Change Innovation Fund (ticker NIPCIPJ LX) returned 68% last year, more than double the gains delivered by the S&P 500. Its biggest holding was Coinbase Global Inc., 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 environmental, social and governance 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% slump in the S&P Global Clean Energy Index coincided with an almost fivefold surge in the market value of Coinbase, the largest US crypto exchange. Crypto enthusiasts then started 2024 on a high after the US Securities and Exchange Commission 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 rumor, sell the fact.”)
Read More: Coinbase at Center of Bitcoin ETF Machine Draws Envy and Risks
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 in an interview.
The fund gets a model portfolio from Ark Investment Management, which was founded by Cathie Wood. It’s then analyzed and implemented by Nikko Asset Management Co. 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 (JPMUSTC LX), which delivered almost 65% 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% over the next five years for its high-conviction public equities, which include Coinbase, CRISPR Therapeutics AG, Block Inc. and Pacific Biosciences of California Inc.
Investors in the fund are no strangers to volatility, with 2023’s huge gains following a slump of more than 50% in 2022, according to data compiled by Bloomberg. And so far this year, Coinbase is down about 25%. Of the 28 Coinbase analysts monitored by Bloomberg, 10 recommend selling, while the average price target is about 7% 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 characterize this as just purely a growth portfolio,” Graf said. “There’s also certainly a small-cap flavor; 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.”
–With assistance from Suvashree Ghosh.
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