Tag Archives: stocks

Monday Morning Memo: ESG Criteria As A Tool For Stock Selection

By Detlef Glow Stock selection is one of the most critical aspects for equity fund managers, since that is the point where they are supposed to deliver so-called alpha as value added from active management and therefore the justification for their management fee. I have had a number of meetings with portfolio managers over the past 20 years, and most of them told me they try to find high-quality stocks. That said, one can imagine the quality of a stock is defined differently by each manager. Asked how they evaluate quality, most managers told me they have implied quantitative screens for financial data, and they meet with the management of companies to verify future expectations of the companies’ operation. But few of the fund managers told me they use environmental, social, or governance (ESG) criteria for stock selection. Nevertheless, nowadays a number of portfolio managers employ at least one ESG criterion in their screening process. This shows that the integration of ESG criteria has gained ground in the conventional asset management industry. From my point of view it is not surprising that even conventional fund managers have started to use ESG criteria, since these data deliver a unique view of a company that is not dependent on financial data. Fund managers who employ ESG data and criteria in their selection process have an opportunity to gain a competitive edge through the use of information that is not used by their competitors. But, what information can be gathered from ESG criteria? Using ESG criteria the research process should lead to companies that have good policies on environmental and social aspects and a strong management that follows best-practice guidelines and has no conflicts of interest. In more detail ESG data can be used to identify so-called corporate-specific risks, i.e., the risk of fatalities, outages, fraud, or strikes as well as macro risks such as labor intensity or a shortage of skills, weather impacts, data protection, security issues, or possible water shortages. From my perspective the lack of education is a key factor of why ESG criteria will not be used widely in the asset management industry in the short term. But, with the turnover in staff and the educational efforts by industry associations and promoters of advanced education courses, the use of ESG criteria will become more popular over time. There is evidence that investors from Generations X and Y are more demanding with regard to information about how their money is invested. In addition, surveys have shown that investors from these generations are also more tuned to a lifestyle of health and sustainability and want to invest their money in funds that have similar goals in place. This means the demand from investors for products using a sustainable investment approach should increase, since Generations X and Y have just started to become investors. From my point of view this demand will be the main driver for a change in thinking and acting within the wider asset-management industry. Early adaptors might be the winners in this trend, since they can build up a reputation as thought leaders, along with a performance track record, prior to their competitors. The views expressed are the views of the author, not necessarily those of Thomson Reuters.

Direxion Files To Launch Innovative Hedged Equity ETF

By DailyAlts Staff The problem with actively managing an ETF is that regulators require daily disclosure of their holdings, and this would potentially allow fund-watchers to “front run” and undermine the ETF’s investment strategies. Eaton Vance’s NextShares “ETMFs” – exchange-traded managed funds – attempt to address this problem by doing away with the daily disclosure requirements, but this also causes the proposed ETMFs to be priced during the trading day at a discount or premium to their net-asset value, rather than in the traditional dollars-and-cents format. Thus, while the idea is good, it may take some time to get investors used to the pricing mechanism. Other proposed “active ETF” formats have yet to be approved by the SEC, but Direxion’s new long/short ETF sidesteps these problems by rebalancing its long holdings on a quarterly basis and actively managing its short exposure in a way that would be difficult (if not impossible) to “front run” – it limits its short positions to the S&P 500 index, rebalancing as often as once a day. Thus, daily disclosure will only allow fund-watchers to “front run” the new ETF’s short portion, and with the market for S&P 500 derivatives so huge, front-runners will have a minimal impact, at most. Direxion filed paperwork with the SEC on July 30, announcing its plan to launch the Direxion Credit Suisse U.S. Hedged Equity Index ETF . The fund, which is expected to launch on or around October 13, will give investors the chance to buy into an exchange-traded long/short equity strategy designed to shift exposure according to the current stage of the global economic cycle: Over-heating, Slowdown, Contraction, or Recovery. Direxion starts with the 1,500 biggest U.S. stocks, by market cap, and filters them for those with characteristics that have previously outperformed during the current stage of the global economic cycle. It selects the 100 stocks with the largest market caps that meet the criteria, and then adjusts its short exposure to the S&P 500 from 0% to 100% of the long position, based on rolling 3-month risk-adjusted return and mean-reversion indicators of the S&P 500. This is also the methodology of the Credit Suisse U.S. Hedged Equity Index, the new ETF’s benchmark. Although Direxion’s new ETF is innovative, it isn’t the first equity-hedged ETF on the market. According to ETF.com , ProShares, First Trust, and Credit Suisse operate similar funds, including the ProShares RAFI Long/Short ETF (NYSEARCA: RALS ), which debuted on December 9 and has a five-star rating from Morningstar.

Market Lab Report – Premarket Pulse 8/17/15

Major averages rose Friday on lower late summer volume. All of the major moving averages remain below their 50-day moving averages and have wedged higher over the past two days after Wednesday’s upside reversal. The S&P 500 has rallied right up into its 50-day moving average, which could set up the context for a pullback from here. The global economy continues to sag, commodities continue to plumb new depths, and central banks continue to print. Despite the market’s trendlessness, certain stocks we have emailed members in real-time have offered some opportunities. Nevertheless, this is a market where baby steps can result in nice profits over a period of time, therefore take profits where you have them in context with the chart, and keep stops tight so you preserve precious gains.