Factor Investing: Rising to the challenges of today’s problems

Gideon Smith

Rosenberg Equities, AXA Investment Managers

Recent months have shown the devastating effects the coronavirus outbreak has had on the world.

Yet, despite the huge toll on individuals, society and the wider economy, one positive of the pandemic has been the improvement in air quality across cities globally, as it has caused emissions to fall. With climate change very much at the top of our minds, it is vital that society and investors do their bit to help the transition to a cleaner and fairer world. More recently, calls for greater equality in society also have become louder, highlighting another challenge that needs collective action.

The challenge

The challenge, therefore, is to match financial returns with non-financial outcomes, and this has given rise to sustainable investment strategies. These come in many forms, but we believe that a factor-based investment approach with environmental, societal and governance (ESG) considerations embedded into the selection of suitable investments, offers investors an efficient way to meet the challenge.

What is factor investing?

Factor investing recognises that there is a historical relationship between stocks with specific characteristics and a risk/return outcome associated with those characteristics. For factors to be considered in an investment strategy, the factors must relate to the economic fundamentals of a company. The “Value” factor, for example, simply recognises the relationship between a company’s assets and earnings and its share price, while the “Quality” factor shows the reward to stocks with persistent earnings growth – perhaps also with an eye on whether that growth may be as strong in the future. Selecting the right factors in combination helps target specific investment outcomes that may help build a long-term, sustainable investment.

ESG and factors

Numerous studies have shown that diversity is important to the success of teams, as its fosters alternative viewpoints and challenges group think. Research conducted by AXA Investment Manager’s quantitative team, Rosenberg Equities, takes this one step further. It shows that diversity in management boards is linked to better current financial results and is also an indicator of the ability of a company to protect its future profitability.

Taking ESG into account in a portfolio

Information on how a company deals with ESG issues is increasingly relevant for investors, with an expectation that investment managers also consider these issues in their assessment of companies.

ESG information can be integrated alongside factor insights with the aim of reducing the long-term risks of an investment portfolio, therefore improving the investment outcome.

We consider ESG in our portfolios in three ways: targeting improved metrics such as carbon and water intensity; excluding harmful or controversial stocks and sectors, and finally through voting and engagement. Active management means more than buying and selling shares in companies. It means being active owners of the stocks, voting at company meetings and engaging with companies and other investors to drive change.

Figure 1: The integration of sustainable criteria into an investment portfolio

There are several ways to integrate the ESG criteria into an investment portfolio: Companies must meet targets for sustainable environmental management, have guidelines for their voting policies and social commitment. Industries that are critical from the point of view of sustainability are excluded. Engagement activities not conducted by Rosenberg Equities directly. No representation is made as to the outcome of engagement activities.

Source: AXA IM Rosenberg Equities. June 2020.

We believe that investors cannot be passive when it comes to being sustainable – actively seeking the best companies from both a factor and ESG perspective allows investors to actively engage in the transition to a cleaner and fairer world, while maintaining their financial objectives.

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Gideon Smith
Chief Investment Officer
Rosenberg Equities, AXA Investment Managers

Gideon is CIO of Rosenberg Equities, chair of the Investment Committee and a member of the Global Leadership team. He is responsible for the implementation of all of Rosenberg’s investment strategies as well as advanced research and innovation.

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