Welton Investment Partners’ ESG multi-asset fund — designed to provide investors with equity-like returns during up markets and downside protection during declines — was first tested in 2022. Most ESG offerings, which generally still only include equity strategies have suffered heavy losses this year. By contrast, Welton’s fund returned 8.04 percent through May, according to sources familiar with its performance. Called ESG Advantage, the fund is only a few years old, but it is based on Welton’s two-decade-old multi-strategy hedging process.
the quantitative manager launched ESG strategies after analyzing disappointing long-term returns of many of the products in the category. It found that investors who eschew the stocks of the largest polluting companies or those without women in their senior ranks performed about as well as a passive index fund. Welton believed it could apply quantitative techniques, including machine learning, long used in hedge funds to improve investment.
While he declined to comment on the fund’s specific performance, François Chevallier-Gravezat, research strategist, Machine Learning Strategies, said this year has shown the company’s statement to be correct. “Between late 2021 and early ’22, it was a good case study for our portfolio,” said Chevallier-Gravezat, a computational mathematician who has solved more than just investment problems. Previously, he modeled the radiological impact of climate and landscape changes on UK nuclear waste deposits.
In the 2021 bull market, he said the strategy performed just as well as the benchmark. This year, when most equity products struggled, the multi-asset approach saw it significantly outperform benchmarks. “We deliver the kind of returns you would expect in a bull market and mitigate the effect of market declines, while also preserving ESG characteristics,” added Chevallier-Gravezat.
When it examined the ESG idea, the company found it strange that most investors only subject stocks to ESG research, rather than a broader range of asset classes. Welton’s multi-asset platform could provide some support to investors and perhaps keep people invested even when things get stressed.
“Ultimately, you don’t want investors running away from ESG when there’s a market event,” says Chevallier-Gravezat.
The multi-asset approach had been a headwind. First, investors simply weren’t buying into hedging strategies — at least until recently. The fund practically matched the returns of the S&P 500 during the bull market. But the fact that it was only “almost” put some investors off.
the question of whether ESG factors can lead to alpha, or outperformance, has been one of the biggest discussions among academics, investors and managers in the high-growth category. (Investors often put money into these funds for reasons beyond performance, such as to help mitigate climate change.) Welton doesn’t shy away from opposing views on the subject. While the manager believes that ESG factors can lead to alpha in the long run, 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 the current ESG alpha is a long-term alpha that will manifest through capital flow from non-compliant ESG markets and in compliant markets, and we aim to to lay alpha by capital allocation in Advantage.” But the chief risk officer added: “We’re also looking at short- and medium-term alpha and we haven’t found any statistical evidence to date that ESG data can help. That’s why Advantage is using other, more traditional data sources to measure performance.” in the short and medium term.”
Detrait said some ESG investors struggle to understand the value of a systematic manager offering ESG investments because the approach is deliberately dry compared to the passion many investors have about the subject. Still, others immediately understand that quants can improve investment by taking the emotion out of the process.
Chevallier-Gravezat is adamant that investments must strike a balance between passion for ESG and results. “You can’t just do ESG to do the ESG. You have to keep in mind [that] the objective of the product [is also] to return. This is something that wasn’t so obvious in 2021, but when it’s more difficult, like now, I think people will come to realize that performance is important, as is sustainability,” he said.