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December 2023 - January 2024
AAM Magazine
Dec 2023 - Jan 2024
Back to 2023 Best of the Best Awards Supplement

Smart beta and sustainability outperform

Sponsored Statement

Amid the current volatility of the markets, smart beta or factor investing may be seen as a viable strategy to aim for better returns. And Northern Trust Asset Management has shown just that, having bagged the regional Best Smart Beta Strategy in Asia Asset Management’s Best of the Best 2023 Awards. It has also been recognised for Best Application of ESG and Best Institution for Diversity, Equity and Inclusion in the region.

The firm’s Head of Asset Management for Asia Pacific John McCareins says smart beta, or factor investing is ensuring that making decisions and designing portfolios is key to achieving specific outcomes. “We’re being very explicit in the risks that we take, and we’re ensuring that we’re compensated for those particular risks.

“In the market environment over the past three years, we’ve seen a fair amount of volatility, and that’s been driven by macro themes as well as idiosyncratic risks as we’ve seen over the last few weeks. However, our portfolio construction process is designed to mitigate those risks and really deploy active decisions where we can generate excess returns.”

He adds that 73% of the firm’s factor investing mandates have outperformed their respective benchmarks since their inception.

Scott Bennett, head of quantitative investment solutions for Northern Trust Asset Management in Asia Pacific points out that one of the biggest drivers of volatility is exposure to uncompensated risks, which include regional exposures and sector exposures. 

“Our process is designed to avoid being exposed to those risks that are uncompensated. To put it in perspective, if we look at the returns in the market for 2022, based on the broad MSCI World index, the spread between the worst performing sector and the best performing sector in 2022 was over 80%. So having even a small amount of sector exposure within your portfolio or your smart beta strategy meant that you either did really well or did really poorly. Our clients have benefited from our thoughtful portfolio construction combined with our own proprietary factors, not only in terms of innovation, but also in portfolio performance.”

Bennett expects volatility to be “increasingly high through 2023”, where the markets, he says, are only two years into a potential seven-year value run. He believes that value-based strategies are going to do well, with a preference for companies with high profitability and, where possible, companies that return the cash flow back to investors either through buybacks or dividends. As such, Northern Trust is focusing on identifying companies trading at a relative discount in the early days into an extended value cycle.

“We are focusing on shorter duration, higher cash flow companies that have a propensity to return that cash flow directly back to investors.”

Furthermore, with sustainable investing being an increasingly considered factor among asset owners and managers alike, Northern Trust Asset Management’s factor investing strategies have long been integrated with the environment, social and governance (ESG) issues. In fact, the world’s seventh largest factor investing firm counts its ability to integrate ESG and sustainability across its platform well as a key differentiator.

“Across the region, the majority of our assets are managed through a sustainability lens,” says Bennett. This means incorporating “what we call pre-financial or ESG data with financial data”. ESG issues are not an add-on or considered exogenously, he adds.

The firm’s proprietary ESG Vector Score assesses publicly traded companies in the context of financially relevant ESG-related criteria that could impact their operating performance. It incorporates multiple viewpoints and data providers to provide a forward-looking view around ESG factors that are material to companies. The system also applies the Task Force on Climate-related Financial Disclosures’ (TCFD) anticipatory framework on governance, strategy and risk management to all financially material ESG risks across the Sustainability Accounting Standards Board’s (SASB) standards.

According to McCareins, about 60% of the assets under management in Asia Pacific have elements of sustainable investing.

Sustainability is also interwoven into the firm’s support of the values of diversity, equity and inclusion. This means engaging with organisations that share similar common values, McCareins says. 

Such a position, crucially reflective of what the firm represents, plays a key role in attracting and retaining talent.

“It signals to the market that this is an organisation that is thinking critically about these themes. In doing so it ensures that we are going to attract, retain and harness high quality talent and therefore deliver high quality, innovative products and services.” he says.