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.
Cbus works with MSCI on emerging markets index
(Pictured: Louise Davidson)
By Penny Pryor
Cbus is currently working with MSCI to identify the worst performing ESG stocks in the emerging markets index, for a new emerging markets index mandate.
Speaking at a session on divestment at the Conference of Major Superannuation Funds last week, Louise Davidson, environmental, social and governance manager at Cbus said they had some concerns about what companies might be in the index.
“We’re just embarking on a new index portfolio in emerging markets and that’s thrown up some interesting ESG issues,” she said.
“Often in emerging markets there are often some difficulty…ESG issues with companies.”
A spokesperson for Cbus said the details of the mandate’s size and fund manager could not be clarified for a few weeks.
It will not be the first time that Cbus tailors index mandates.
“We haven’t had problems with our index managers being able to remove them from the portfolio at reasonable or no additional cost,” Davidson said.
Companies that are excluded from the emerging market index will be notified.
“But we will also engage with them about why they have been excluded,” Davidson said.
Also on the same panel, Peter Lambert , chief executive officer at Local Government Superannuation said they continued to use a long/short overlay for mandates where they found it difficult to divest certain companies from for ESG reasons.
“We short out companies we hold an exposure to, because we are not able to do it through the actual manager.”
LGS then researches to find better-behaving companies in the same industry to invest in.
“Where you have exposure through index funds, we’re now able to get some tailored index funds at reasonable cost,” he said.
