Kiplinger 25: Our Green Fund Sees Some Red

Investors in sustainable mutual funds seek two kinds of green: market-beating returns generated by en­vironmentally friendly investments. That’s not an easy proposition, but lately bond investors have been having their kale and eating it, too. The bond market in March saw a swift 3.8% decline in the Bloomberg Barclays U.S. Aggregate Bond index. A version of the index tilted to maximize exposure to environmental, social and governance factors, meanwhile, held up a bit better, falling 3.6%, due in part to an avoidance of COVID-ravaged sectors such as energy.

TIAA-CREF Core Impact Bond (symbol, TSBRX), an ESG-focused fund and new member of the Kiplinger 25, didn’t fare as well. The fund lost 8.6% during the sell-off, partly because it held just 14% of assets in Treasuries and U.S. agency bonds, the best bond sectors this year. By contrast, Treasuries make up 40% of the fund’s benchmark, the Agg index.

Even so, Core Impact has delivered over the long term. Since its 2012 inception, its 3.4% annualized return has beaten its bogey and its average peer—a group that includes intermediate-term, core-plus bond funds, which can stray from the asset mix of traditional core bond funds. (Funds meant to mimic the holdings of the Aggregate index are said to be “core” funds.)

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Core Impact has a green tint. Some 60% of the fund’s assets are invested in bonds issued by companies or entities that score in the top half of their peer group on en­vironmental, social and corporate governance criteria. The remainder of the portfolio is invested in so-called “impact” projects aimed at sustainable goals, such as preserving natural resources and creating renewable energy.

Since the sell-off, some bond sectors have rebounded, thanks to the Federal Reserve’s promised support. But lead manager Stephen Liberatore says, “I have a feeling that things have gone too far, too fast.” He’s selling corporate bond holdings that have rallied and buying more agency-issued mortgage-backed securities. “We’re making the portfolio more defensive,” he says. The fund has recovered some, too. Since the market bottom in March, both the fund and the Agg index have gained 5.2%.