Before we take the plunge into this week’s election agenda, I’d like to take this opportunity to invite you to join me on Tuesday, Oct 27 for the fourth and final webinar in our Best Practices in Hedging series where I will be demonstrating: Single Stock Hedging Using SmartTrades™. This is designed to be a practical and hands-on session where I will showcase some of the latest Omega Point functionality to build single-stock hedges that can maximize the alpha in your ideas. I am looking forward to answering any of your questions and do hope you can join us. If you missed the previous three webinars in this series, no worries as you can view the recordings and access the slide decks by going to the following links:
Now on to this week’s election coverage.
Green Basket Design Methodology
To start, we looked to MSCI’s industry leading ESG ratings framework to design our green baskets. MSCI’s ESG Ratings are available via the Omega Point ecosystem, making it easy to leverage this content for portfolio construction. The MSCI ESG dataset provides extensive and detailed data across all three ESG pillars; however, we’ll be focusing on the 4 themes that make up the Environment Pillar: Climate Change, Natural Resources, Pollution & Waste, and Environmental Opportunities. The table below shows the key issues that are considered in each theme.
Source: MSCI ESG Ratings Methodology Guide
3) Purify Factor-Targeting Portfolios
Does Purifying the Basket Really Matter?
To demonstrate the power of “purifying” our green baskets, we’ll compare the current risk profile of the equal-weighted portfolios from step 2 to the current risk profile of the optimized portfolios from step 3.
Factor Traits of the Green Baskets
As with any thematic basket, it’s important not only to gain exposure to the theme you’re targeting, but also to ensure that you don’t pick up any unwanted systematic factors along the way. Many arguments have been made that targeting green themes in portfolio construction can translate to sector bets on Information Technology and Energy, given how ESG tends to impact companies in those sectors. However, when we drill into the sector weights, we can see a different story emerge.
It Ain’t Easy Being Green... Or Is It?
Using the three steps we’ve outlined above, investors can easily create green tilts in their portfolio while avoiding undesirable systematic factors. For investors who believe that ESG will play a major role in the election, any of the thematic baskets that we’ve created, or baskets created in a similar fashion using other ESG factors, could be key to coming out on the right side of the volatility that is sure to ensue post-election. Not only will this be an important consideration in the short-term with the upcoming election, but also in the long-term as the investment management community increasingly leverages their financial resources to push for ESG-awareness within their portfolio companies.
|US & Global Market Summary|
US Market: 10/19/20 -10/23/20
Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)
Please don’t hesitate to reach out if you’d like to discuss any of these ESG themes, creating baskets in Omega Point, or the potential impact of the election on your own portfolio.