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.

Methodology

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.

Portfolio Analysis

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.
Above we see that the “Bottom Social Agg“ portfolio’s Value exposure is higher than the Russell 1000 and the ”Top Social Agg” portfolio. Low Social stocks are currently trading relatively less to their book value.

The first half of 2020 has been a tumultious ride so far, and the markets are still churning. An increased focus on being socially responsible, especially for larger companies, is a phenomenon we will continue to watch. Just this past week we’ve seen more momentum, including the #StopHateForProfit movement. While socially-conscious companies have underwhelmed from a performance perspective in 2020 thus far, the dust is still settling and time will illuminate if this becomes a significant longer-term trend.

US Market: 6/22/20 - 6/26/20

• US Stocks fell sharply Friday as confirmed new coronavirus infections in the U.S. hit an all-time high, prompting Texas and Florida to reverse course on the reopening of businesses.
• The Dow, S&P 500, and Nasdaq Composite all ended the week down by 3.31%, 2.86% and 1.90% respectively.
• All 11 S&P Sectors were negative, led to the downside by energy, down 6.44%. Tech was the best performer, down 0.45%.
• Nike (NKE) shares slid after reporting a surprise quarterly loss. Facebook slumped 8.3% as an advertising boycott aimed at pressuring the social networking giant into doing more to prevent racist and violent information from being shared on its service intensifies.
• Financial companies were among the biggest decliners after the Federal Reserve ordered many of the nation’s biggest banks to suspend buybacks of their stock and cap dividend payments for several months.
• Stocks in Europe closed mostly lower on Friday while Asian markets closed higher prior to the news.

Factor Update: Axioma US Equity Risk Model (AXUS4-MH)

• Momentum saw the week’s biggest gains and continues its recent run after touching a bottom on June 10.
• Size continues its advance over the last several weeks and further away from deeply oversold territory.
• Volatility and Value all slid for the second week in a row, with Market Sensitivityclose to the mean.
• Earnings Yield saw a nice bounce back after being the biggest losing factor last week.
• US Total Risk (using the Russell 3000 as proxy) declined by 19bps this week.

Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• Momentum saw the biggest global gain for the second week in a row and further away from its trough of -3.13 SD below the mean on 6/10.
• Size continues to rally sharply, and now sits at the cusp of positive territory for the first time since late April.
• Exchange Rate Sensitivity moved deeper into overbought territory, and light years away from its spot at -4.9 SD below the mean on 3/31.
• For the second week in a row, Market Sensitivity and Volatility were the 2 biggest losers in the global model, and are closing in on negative territory.
• Global Risk (using the ACWI as proxy) fell by 26bps.

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.

Regards,
Chris