ESG fund trounces peers helped by bold bet on defence stocks
AN ESG fund run by Alken Asset Management has outperformed 98 per cent of its peers over the past year, helped by a bet on European defence stocks while they were still cheap.
The Alken Fund Sustainable Europe is up about 9 per cent in the period, compared with an average drop of roughly 9 per cent among similar funds, according to data compiled by Bloomberg. Aside from defence, which represents about 8 per cent of the portfolio, the fund’s gains were driven by its exposure to energy and raw materials.
London-based Alken, which oversees about 1.5 billion euros (S$2.1 billion) in total, is the latest example of an investment manager offering outsized ESG returns by betting on industries that aren’t generally associated with environmental, social or governance goals. Alken’s Sustainable Europe fund, which is registered in Luxembourg, qualifies as a so-called Article 8 product under European ESG rules, meaning it “promotes” sustainability.
After years of under-investment, Europe’s defence sector was undervalued and poised to “benefit massively” from the current political climate, Nicolas Walewski, founder of Alken Asset Management and co-manager of the firm’s Sustainable Europe fund, said in an interview.
Alken started buying defence assets in the middle of last year, Walewski said. He and his team were “surprised” that others weren’t doing the same, but more investors then “actually jumped in fairly quickly in March and April,” he said. The portfolio is overweight industrials, with its exposure to defence stocks including companies like Thales, and to the energy sector.
When it comes to ESG bets, defence stocks are about as controversial as it gets. The weapons industry has this year embarked on an intense lobbying campaign urging European lawmakers to label such assets as sustainable, and points to the West’s race to arm Ukraine to underpin its case.
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
But ESG purists argue that treating tools ultimately designed to kill as sustainable assets would be a slap in the face of everything that ESG is supposed to stand for. And with the arms industry “responsible for millions of deaths”, ESG data cruncher Util has characterised the whole idea as misguided.
According to a Jul 12 report by analysts at Goldman Sachs Group, ESG fund ownership of aerospace and defence stocks overall was lower in June compared with October last year as managers went more underweight.
Walewski said it’s wrong to rule out defence stocks as sustainable assets in the current geopolitical climate, in which authoritarian regimes are growing increasingly belligerent toward Western democracies and their allies.
“We have to defend our countries,” he said. “You don’t defend your countries with flowers.” Which sectors should be treated as ESG is “open to debate. Finance is investing where the money is. Sometimes the money is in tech, sometimes it’s in defence.”
Investors that bought European defence stocks well before the war in Ukraine have enjoyed considerable gains over the past year. Rheinmetall, one of Germany’s biggest arms manufacturers, is up almost 120 per cent this year alone as Chancellor Olaf Scholz recasts his country’s post-World War II policy with an historic arms spending spree. French defence company Thales has gained about 60 per cent.
There’s been a “wake-up call,” Walewski said. Other Article 8 funds “do invest in conventional weapons, some even in controversial ones”. Alken is just saying out loud “what everyone is doing in the shadow, exposing ourselves to critics,” he said.
The Alken fund, which has avoided all exposure to so-called controversial weapons such as cluster munitions, has in the meantime trimmed its exposure to defence somewhat. But Walewski said he expects the sector to remain attractive. “Of course they’re not going to outperform by 100 per cent every 6 months, but we still think the long-term future is bright.”
“It will take years for these companies to keep up with the demand,” he said. “The world is unsafe.”
Goldman Sachs’ basket of European stocks with exposure to defence spending, which includes Rheinmetall, Thales and BAE Systems, is up 58 per cent this year, compared with a 13 per cent decline for the benchmark Stoxx Europe 600 Index. Meanwhile, sectors that have traditionally been ESG darlings - such as tech - have slumped in 2022, with the MSCI World Information Technology Index down about 24 per cent.
“Defence is good. It’s very sustainable,” Walewski said. “We’ve just rediscovered that.”
The Sustainable Europe fund that Walewski co-manages revamped its investment approach a few years ago and now pays much closer attention to any warning signs that a company might be hit by potential governance issues. That’s after being burned by its stake in German electronic payments provider Wirecard, which collapsed in 2020 after becoming embroiled in an accounting fraud scandal. The company made up around 10 per cent of Alken’s Sustainable Europe fund at one point. The asset manager has sued Wirecard.
The fund’s embrace of energy stocks has been a major driver of returns, with the sector being the best performing subgroup in the Stoxx Europe 600 Index this year. Alken targets companies that invest a “significant part” of their capital spending on the energy transition.
“That’s the best way to be a sustainable fund,” Walewski said. He also sees hydrocarbons as an essential part of the world’s power supply for decades to come. “It’s unsustainable not to allow us to satisfy 80 per cent of our energy needs for at least the next 10, 15 years.”
“We cannot increase the speed of renewables in the global energy mix that much,” Walewski said. “It will remain a moderate part of the global energy mix for a very long time. Not 2, 3 years - a very long time. 20, 30 years at least.” BLOOMBERG
Share with us your feedback on BT's products and services
