ESG INVESTMENT STRATEGY USING QAS RISK FRAMEWORK
Full Coverage Quantitative Approach to ESG Investing for Investment Advisors World-Wide
This investment strategy (S-121 Global ESG Stocks-Bonds Strategy Index) is currently licensed to a US Asset Management Company.
ESG vs. Traditional Financial Analysis
The ESG investing theme is taking over the world, literally. Global ESG-data driven assets hit $40.5 Trillion in 2020, according to the “Pensions & Investments” publication. This relatively new investment class that is also known as “Sustainability Investment” reflects a paradigm shift from a traditional “financial-data” driven investment approach to a “non-financial-data” factor-driven investment analysis.
The “ESG” abbreviation stands for and includes the following segments:
E – Environmental (considering such issues as climate change, pollution and others as shown below)
S – Social (considering such issues as impact on local communities, corporate diversity and others as shown below)
G – Governance (considering such issues as corporate structure, corruption and others as shown below)
Topics-Inputs into ESG Score Calculation
As you can see, all of the factors that go into an ESG score calculation are mostly of a “non-financial” nature. However, these issues are becoming increasingly important to the investment community, especially to the younger generation of investors. I would also note that there is enormous enthusiasm in the ESG investment movement amongst European institutional investors. As an example, some Nordic Countries’ Government-sponsored pension funds are currently up to 90% invested in various ESG-data driven investment instruments. We notice massive creation of “ESG” teams/departments within investment companies around the world.
With the introduction of many new investment products (mutual funds and ETFs) in the US, we see an increasing interest in the ESG investment theme in our country as well, and specifically amongst the retail investment segment.
We believe the time is right to introduce new and innovative ESG-data driven investment strategies in the US. This investment theme is here to stay.
“Do Good” Factor and a Self-Fulfilling Prophecy
The philosophy behind the ESG investment theme is based on the honest belief that by investing in ESG-selected companies you actually “give back” and contribute to your community while creating a positive impact on the world. Essentially, it gives you an opportunity to “do good” and make money at the same time.
Some ESG investment professionals believe that going forward ESG could become a self-fulfilling prophecy as more money flows into highly-ranked ESG score stocks and out of low-ranked stocks, which can potentially provide strong outperformance.
It makes sense, considering such a high AUM growth and demand in this investment segment in recent years.
ESG Investment Universe
According to ETF.com, there are currently 114 different “socially responsible” ETFs capturing exposure in investment instruments across all asset classes.
The top AUM ESG ETFs are following MSCI indexes, which utilize MSCI’s own ESG scoring methodology. Evidently, MSCI is emerging as a leading ESG index provider for investment fund creation.
With so many investment choices on the market, it is becoming increasingly difficult for investment advisors to navigate this rapidly growing ESG investment universe.
QAS “Full Coverage” Quant Approach
When we decided to build a comprehensive ESG strategy, we wanted to capture various aspects of the ESG investment theme to make it a complete or “full coverage” investment solution:
- Global ESG Stocks and Bonds Exposure via ETFs (US, EU, EM)
- Multi-Asset, Stock-Bonds
- Leverage and Protection, Dynamic Exposure
- Risk-Based Quant Algorithm for All Market Conditions/ Safety (per QAS Risk Framework)
Our investment objective here is to outperform traditional balanced 60/40 stocks-bonds and broad-based benchmarks with a consistent alpha generation.
As this is an active strategy, we want to take advantage of strong positive markets by leveraging stock market exposure, while providing downside protection during negative market conditions by reducing exposure in stocks and increasing exposure in the “safety basket” (bonds, gold, cash).
Our quantitative algorithm consists of five regimes:
QAS S-121 Global ESG Stocks-Bonds Strategy (Regimes / Exposure)
This is an active tactical strategy approach to provide various sources of alpha:
- Leverage (maximum stocks exposure)
- EU outperformance relative to US (more EU stocks exposure)
- US outperformance relative to EU (more US stocks exposure)
- Protective Neutral (reduce stocks exposure, increase bonds, gold, cash exposure)
- Protective Strong (minimum stocks exposure, maximum bonds, gold, cash exposure)
As of October 1st, 2020, the QAS S-121 Global ESG Strategy is in Regime 1.
We gain global ESG US, EU, and EM stock exposure as well as ESG bond and Cash instruments with a comprehensive suite of iShares ETFs, leveraged exposure via ProShares ETFs, and gold exposure via SSGA’s GLD.
The most exciting part of the portfolio construction is that the ETFs with underlying global MSCI ESG indexes provide us with the most comprehensive and current group of stocks with the highest ESG rankings at all times. This way we are guaranteed a complete global coverage of ESG stocks and bonds. Going forward, as we expect more and more stocks will be getting qualified for inclusion in these indexes, and therefore global ESG universe will be expanding each year.
Our sophisticated 5-regime algorithm reviews all instruments once a week, and if necessary makes an allocation switch. Our goal is to deliver an effective active ESG balanced investment solution with embedded downside protection.
This strategy has delivered superior returns compared to all relative benchmarks in 2020 YTD, as of 10-01-20:
QAS S-121 Global ESG Stocks-Bonds Index +22.35%
SPY +6.08%
Global ESG Stocks-Bonds 60/40 Proxy Benchmark +9.40%
iShares MSCI USA ESG Select ETF (SUSA) +10.30%
QAS S-121 Global ESG Stocks-Bonds Index returned +37.30% on a 3-yr Avg Annualized basis vs. +21.90% (SPY).
QAS S-121 Global ESG Stocks-Bonds Strategy vs. SPY (2020 YTD Performance as of 10-01-20)
For more information please visit www.qas-service.com
Disclaimer:
https://qas-service.com/disclaimer/