ESG fund trounces peers aided by bold bet

An ESG fund run by Alken Asset Management Ltd. 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 (ALCSEU1 LX) 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 (US$1.5 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 underinvestment, 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.

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 SA, 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.

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 characterized the whole idea as misguided.

According to a July 12 report by analysts at Goldman Sachs Group Inc., ESG fund ownership of aerospace and defence stocks overall was lower in June compared with October last year.

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.”