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Combining Socially Responsible and Multi-Factor Strategies

MANAGING INVESTMENTS FOR BOTH VALUES AND RETURNS:

Investors interested in ensuring that their values – social, environmental, or ethical – are reflected in their investment strategies represent a growing segment of the market. With these investors’ specific concerns as diverse as they are, individuals and institutions seeking “socially responsible” options have often struggled to find a portfolio strategy which suits their specific objectives in a customizable manner. Additionally, traditional Socially Responsible Investment (SRI) screens and indexes have historically lagged non-SRI benchmarks, potentially offering these investors lower expected returns. At Gerstein Fisher, we believe our quantitative approach and factor-based strategies offer the opportunity for highly customizable portfolios screened for social concerns and tilted towards characteristics (or factors) which have higher expected returns and can potentially match or exceed the expected returns of a non-SRI benchmark.

Unfortunately for those investors who do have objectives for their investments beyond capital appreciation, strategies that screen for Environmental, Social, or Governance (ESG) criteria can have significantly different exposures to certain industries and sectors and run the risk of lower expected returns than for non-screened benchmarks. For example, the FTSE US Social benchmark1 underperformed the Russell 1000 Index by almost 0.7% annualized from July of 2001 to June of 2017. While many investors may be more than willing to take the risk that such underperformance continues in the future in exchange for being comfortable with their portfolios, we believe that it may be an unnecessary trade-off. Through our quantitative Multi-Factor® investment strategies, we believe we can build a portfolio which both limits exposures to a variety of ESG metrics and manages risk exposures to improve the expected return.

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