Over the past 3 weeks we’ve focused on the Social components of OWL Analytics’ ESG composite datasets, including an analysis of historical trends in “Human Rights” and “Employee Diversity & Rights” factors. We have been able to uncover some promising evidence that companies ranked high on social factors also exhibited stronger performance historically. As we had discussed in the kick-off issue of our series, we believe that the investment community is in an especially unique position to enact change by choosing where we deploy our capital.Today we wrap up our series on Socially Responsible Investing by examining how “High Social” and “Low Social” companies have performed to-date in 2020, and look for any early signs of outperformance in the recent wake of wider calls for social changed spurred on by the Black Lives Matter movement.
We start by taking the Russell 1000 and selecting 200 of the highest Social names overall to build a long-only portfolio that minimizes active risk relative to the Russell 1000. The goal is to minimize risky industry bets and build position sizes which are correlated to the weights in the Russell 1000 (i.e. assets with larger market caps in the Russell 1000 will be held at a larger position in the portfolio).
We have named this portfolio “Top Social Agg”, and then repeat this process for the lowest 200 Social names - “Bottom Social Agg”. These portfolios were not rebalanced so that we could better emulate a long-term investor’s holding horizon.
Interestingly, all three of these portfolios tracked closely until mid-March when COVID began its assault on the markets, after which we saw an expanding performance divergence resulting from a sharper drop in the “Bottom Social Agg” portfolio and much lesser drop in the “Top Social Agg” portfolio versus the Russell 1000 portfolios. This is likely due to higher diversification in the Russell 1000 and an environment less focused on social impact.
While both Social portfolios underperformed the more diversified Russell 1000 and didn’t appear to have been impacted by the Black Lives Matter protests intensifying in late May, we realize that it’s still early in the game and wider societal momentum takes time to filter into the markets.
We will be keeping a closer eye on the peformance of these three portfolios and publish updates as we observe significant trends.
In addition to poorer performance, the “Bottom Social Agg” portfolio also has the highest realized volatility and the largest Max Drawdown.
The Top/Bottom Social Agg portfolios also didn’t deliver alpha over this time period. The primary drag associated with these portfolios came from their exposure to the Market, with some extra pain for the Low portfolio coming from exposure to style factors:
We see that Size and Value exposures hurt the “Bottom Social Agg” portfolio the most - below is how these portfolios were exposed to these factors:The “Bottom Social Agg” portfolio also has a much smaller Size exposure than the Russell 1000 and the Top Social Agg portfolio. Given the factor return for Size has been positive YTD, this factor hurt overall portfolio performance.
US & Global Market Summary
US Market: 6/22/20 - 6/26/20
Please let us know if you’d like to learn more about incorporating ESG data into your own process, or would like to analyze your portfolio through the Omega Point factor lens.