This quantitative manager offers a rarity: an ESG fund on the rise this year

Welton Investment Partners’ multi-asset ESG fund – designed to provide investors with equity-like returns during bull markets and downside protection during bear markets – had its first test in 2022. Most ESG offerings , which are still generally long-only equity strategies, have suffered heavy losses this year. In contrast, the Welton fund returned 8.04% through May, according to sources familiar with the performance. The fund, called ESG Advantage, is only a few years old, but is based on Welton’s two-decade-old multi-strategy hedging process.

The quantitative manager launched ESG strategies after analyzing the disappointing long-term returns of many products in the category. He determined that investors who shun the stocks of the biggest polluting companies or those with no women in their senior ranks do about as well as a passive index fund. Welton thought he could apply quantitative techniques, including machine learning, that had long been used in hedge funds to improve investments.

While he declined to comment on the fund’s specific performance, Francois Chevallier-Gravezat, research strategist, Machine Learning Strategies, said this year has shown the company’s thesis to be correct. “Between late 2021 and early 22, this was a good case study for our portfolio,” said Chevallier-Gravezat, a computer mathematician who has solved more than investment problems. He has previously modeled the radiological impact of climate and landscape change on UK nuclear waste repositories.

In the 2021 bull market, he said the strategy performed as well as the benchmark. This year, when most equity products are struggling, the multi-asset approach has allowed it to outperform benchmark indices by a significant margin. “We deliver the kind of returns you expect in a bull market and mitigate the effect of market downturns, while preserving ESG attributes,” added Chevallier-Gravezat.

While researching the ESG idea, the firm thought it odd that most investors only subject stocks to ESG scrutiny, rather than a wider range of asset classes. Welton’s multi-asset platform could provide investors with some cushion and perhaps keep people invested, even when things get stressful.

“At the end of the day, you don’t want investors to run away from ESG when there’s a market event,” Chevallier-Gravezat said.

The multi-asset approach had been a headwind. For one, investors simply weren’t buying into hedging strategies, at least until recently. The fund nearly matched the performance of the S&P 500 during the bull market. But the fact that it was still only “almost” a deterrent for some investors.

Whether or not ESG factors can lead to alpha, or outperformance, has been one of the biggest debates among academics, investors and managers of the fast-growing category. (Investors often put money into these funds for reasons other than performance, including to help mitigate climate change.) Welton is quick to share his contrary view on the subject. Although the manager believes that in the long term ESG factors can generate alpha, he is a little skeptical that this leads to returns that cannot be explained by the benchmark in the short term.

Guillaume Detrait, President and Chief Risk Officer, said: “We believe that current ESG alpha is long-term ESG alpha that will manifest itself in capital flows out of non-compliant ESG markets into compliant markets, and we aim to capture that. alpha through capital allocation in Advantage. But the chief risk officer added that “we are also concerned about short to mid-term alpha and we have not, so far, found any statistical evidence that ESG data can help with that. That’s why Advantage uses other, more traditional sources of data to generate performance over short and medium periods.

Detrait said some ESG investors struggle to grasp the value of a systematic manager offering ESG investing because the approach is deliberately dry compared to the passion many investors bring to the subject. Yet others immediately understand that quants can improve investments by removing emotion from the process.

Chevallier-Gravezat is convinced that investments must strike a balance between passion for ESG and the performance of results. “You can’t do ESG just to do ESG. You have to keep in mind [that] the purpose of the product [is also] deliver return. It’s something that wasn’t so clear in 2021, but when it’s more difficult, like now, I think people will realize that performance matters, as well as durability,” he said. .

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