Smart beta specialist Ossiam has launched a new fund in Europe, providing exposure to a low carbon portfolio of US equities.
Bruno Poulin, CEO of Ossiam.
The Ossiam US ESG Low Carbon Equity Factors UCITS ETF (OUFE) is actively managed, in the sense that it is not linked to a specific index, although the fund’s security selection process is driven by a systematic rules-based, multifactor model.
Methodology
The fund, which is available in US dollar and euro share classes, takes its constituents from a ‘Total Universe’ of US-listed stocks comprising the components of the Solactive GBS United States Large & Mid Cap Index plus the largest stocks in the Solactive GBS United States Small Cap Index.
The investment process first removes stocks accounting for 20% of the market capitalization of each sector that have the lowest environmental, social, and governance (ESG) scores according to data from ESG research firms Sustainalytics and Trucost.
The process then applies an ethical filter to exclude securities that are embroiled in severe business controversies; are involved with controversial weapons; have significant operations in the tobacco or coal industries; are not compliant with the UN Global Compact principles; or are electricity producers that generate more than 20% of their production from coal-fired plants.
Securities that pass this ethical filter constitute the ‘Eligible Universe’ which is used to build two distinct portfolios: a Stock Factor Portfolio and a Sector Factor Portfolio.
The Stock Factor Portfolio screens the Eligible Universe according to a proprietary quantitative model that favours stocks with strong momentum, size, value, and low volatility characteristics. To make it into the portfolio, a stock must rank among the top half of the distribution in at least three out of the four factors.
Securities are weighted according to an optimization process that aims to maximize the overall factor exposure while limiting the current and future potential greenhouse gas emissions relative to the Total Universe to 40%.
The Sector Factor Portfolio weights the securities in the Eligible Universe so as to minimize sector weight deviations relative to the Total Universe while also limiting total greenhouse gas emissions per sector to 40% relative to the Total Universe.
Sector weights are then adjusted so that each sector has a weight that corresponds to the combination of its weight within the Total Universe and a coefficient that favours sectors with strong value and momentum characteristics.
The Stock Factor Portfolio and Sector Factor Portfolio are then equally combined to comprise the ‘Final Portfolio’. The weight of any single stock is capped at 4.5%, and the weight of any sector is capped at its weight in the Total Universe plus 20%.
Bruno Poulin, CEO of Ossiam, commented, “The launch of our latest ETF exploits the strength of evidence for equity factors as a means of achieving alpha over the long term.
“We believe that a static approach to factor investing is inefficient. Our dynamic approach recognizes the existence of factors at both sector and stock level, which complement each other under different market conditions. On that basis, our exposure to multiple factors at both levels enhances diversification.”
The fund comes with a total expense ratio (TER) of 0.45%. It is available to trade on London Stock Exchange and Deutsche Börse Xetra.