Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… as ESG-oriented managers outperform in crisis
AXA Investment Managers has shown that, in the coronavirus crisis, funds and strategies which have an ESG bent outperformed those that didn’t. This is intuitive. The client note supports the notion that an observance to ESG principles adds value for investors, especially in market downturns. It’s mainly a risk thing.
The AXA-IM note, authored by Thomas Roulland, the head of ‘Responsible Investing solutions, models and tools’, and Yo Takatsuki, the head of ‘ESG research and active ownership’, says that:
- Companies with the highest ESG ratings have proven more resilient in the coronavirus market crash than those with the lowest, AXA IM analysis of stock and bond market in Q1 2020 shows.
- In equities, stocks in the ESG Leaders category outperformed those in ESG Laggards by 16.8 percentage points in Q1.
- In fixed income, bonds in the ESG Leaders category outperformed those in ESG Laggards by 5.2 percentage points in the same period.
- In both asset classes, the ESG Leaders also outperformed its parent benchmark index.
They said, in a separate analysis, that they looked at the impact of AXA-IM’s firm-wide investment exclusion policies. They show that a portfolio of stocks which apply “our exclusion lists” outperformed the parent benchmark index by 47bps.
“The growth of responsible investment over the past decade has largely coincided with the longest stock market bull-run in history. This has meant that we have not been able to observe how companies with different environmental, social and governance (ESG) ratings perform in a severe market downturn,” the authors say.
In phone interviews following the release of the firm’s client note, Thomas Roulland and Matt Christensen, the global head of responsible investment at AXA-IM, said that being conscious of ESG principles shone out in results for investors, particularly in times of crisis. And it was no longer an issue that ESG-oriented investors might leave money on the table during the good times, either, they said. Over medium-to-longer terms, which institutional investors focused on, they added value.
The report shows that stocks ranked by AXA-IM as ‘ESG Leaders’ had a market return of minus 14.5 per cent in the first quarter of this calendar year. The stocks ranked as ‘ESG Laggards’ had a market return of minus 31.3 per cent. Putting those number in perspective, the MSCI ACWI index over the same period showed a return of minus 19.6 per cent.
In a similar AXA-IM analysis, for the corporate bond market, the ‘ESG Leaders’ returned minus 1.8 per cent over the first quarter this year, versus the ‘ESG Laggards’ return of minus 7.0 per cent. The index return was minus 3.2 per cent.
AXA-IM is well known for its ESG-oriented portfolios, especial in Australia and New Zealand. According to Craig Hurt, the firm’s Australia and NZ country head, the majority of the firm’s mandates in the region were ESG related.
Hurt said: “Our firm has put a lot of emphasis on sustainable, ethical, ESG strategies, whatever you want to call them, for a very long time. Along with some European countries, Australian and New Zealand institutional investors are appreciative of that.”
– G.B.
