Multi-asset ESG portfolios will always be higher risk for clients than non ESG funds, according to Lothar Mentel, chief executive and chief investment officer at discretionary fund house Tatton Investment Management.
Mentel said his firm’s view is that ethical investment portfolios should not contain government bonds as governments are inherently 'unethical'.
Government bonds are traditionally included in multi-asset portfolios to act as a diversifier from equity risk, and Mentel said their absence from many ESG portfolios instantly made those portfolios riskier.
He added, on the equity side, most companies that comply with ESG criteria would fit into the growth style of investing, leaving clients exposed if value stocks outperform growth stocks.
Tatton Investment Management presently runs 18 funds and has assets under management of £9.5bn.
Mentel said asset growth had been fuelled by what he said was the very low fee charged, 0.15 per cent.
He said: “We burned through a lot of cash initially by coming into the market with that price point, and knew we would until we got to £1bn of assets under management.
"People said to us initially that we couldn’t possibly be doing the investment management properly at a 15 basis point fee level, but one of the things we wanted to show them was that we have a proper macro team, we have market strategists and a chief economist.
"Top down matters as much as bottom up when it comes to fund selection.”
He said one of the features of the Tatton investment strategy in future was likely to be the use of segregated mandates, but even now the firm was happy to seed fund launches with £50-£100m if it liked the manager.
Mentel said more than half the capital was in passive funds, as advisers were “increasingly conscious of costs, and this is one way to manage that.”
The red flags that would put him off investing in a fund are illiquidity and clarity.
He said: “If we can't be sure we can get our cash out then we wouldn’t go near it. That is why we have don't own open-ended property funds in the portfolio.
"The other red flag for us is if the fund manager cannot explain the performance they are achieving, if they cannot explain the process and are just asking me to believe in their genius, that is something that would put us off.”