Arabesque: A Tesla of finance
Timothy Nixon interviews Omar Selim from Arabesque Asset Management, the world’s first ‘ESG quant fund’.
1. Arabesque is a relative newcomer; what is your vision and how is it different from other asset managers?
Arabesque, the world’s first “ESG quant fund,” is the story of professors, from universities such as Harvard and Oxford, and professionals from finance, mathematics, and sustainability ESG, working together to develop the next generation in asset management. Our technology integrates environmental, social, and governance (ESG) data with quantitative investment strategies. The word “Arabesque” describes geometric art built with mathematical equations. At Arabesque, we use patterns to organize an investment universe of 1,000 global stocks into a combination that delivers a superior risk-return profile, using fundamental, quantitative, forensic, financial, and nonfinancial data.
What defines us is not just the technology we use, but also how we express our commitment to sustainability through our choice of instruments. We refrain from any derivatives, securities lending, shorting, or leverage, while still outperforming 95 percent of our conventional peer group. In short, our performance engine is to the finance industry what Tesla is to the car industry – a clean and new type of transportation.
Starting Arabesque was not a question of timing, but simple logic, once we found a way to use nonfinancial information to generate outperformance. The investment proposition turned from “Why invest sustainably?” to “Why not invest sustainably if one could achieve better returns?”
2. Please tell us about some of the thought leaders you have attracted to your firm. Why are they joining?
Arabesque is a platform for ideas and partnership between like-minded people who can see the power of ESG integration by companies and investors to transform our capital markets. Better resource allocation decisions will be made to both improve performance and contribute to a more sustainable society. I think that is the core appeal.
From day one, Arabesque has been built with this spirit of collaboration. From the early founding of the firm to the present day, we have worked closely with leading professors from universities including Harvard, Stanford, Oxford, Cambridge, University College London (UCL), and Maastricht.
Our philosophy is that only by working alongside industry and academic leaders in the field can the financial markets truly contribute to sustainable development. The team we have built across our board and advisory board very much reflects this and includes a cast of the world’s leading figures in sustainable development, quantitative, and behavioral finance.
Our chairman is Dr. Robert Eccles, professor of management practice at Harvard Business School and a global leader in integrated reporting and in understanding value creation through the integration of material ESG factors. Next to him on Arabesque’s board is Georg Kell, our newly appointed vice chairman and founding executive director of the UN Global Compact. I would go so far as to say that Georg is the very architect of corporate sustainability, having played a transformative role in changing the understanding of how companies can contribute to sustainable development. Georg also played an instrumental role in the founding of the investor-based Principles for Responsible Investment.
Members of our advisory board include Dr. Rob Bauer, professor of finance at Maastricht University and three-time winner of the Moskowitz Prize for his research and work in socially responsible investing, and Professor George Serafeim, associate professor at Harvard Business School and a rising star in sustainability research. Also, on the quant side, Professor Philip Treleaven, professor of Computer Sciences at UCL and Dr. Michael Griebel, director of the Fraunhofer Institute for Algorithms and Scientific Computing.
Going back to the Tesla analogy, the countless hours of research and development required to develop innovative and clean new technologies is akin to what we apply here at Arabesque in the finance space. We have an ongoing research program in order to better understand the relationship between ESG performance and financial performance, not only to further enhance Arabesque’s own products for investors but to also share knowledge within the field.
3. Please describe the growth/performance of your funds(s) since inception.
We have recently completed the first full year of performance of our funds, Prime and Systematic. Since their launch in August 2014, both funds have consistently outperformed the benchmark of the MSCI All Country World Index. Over the first year, Arabesque Prime, a long only, smart Beta fund, outperformed the benchmark by +313 bps, while Arabesque Systematic, built on quantitative systems capturing market sentiment, outperformed by +1087 bps.
When ranked against their respective Morningstar peer groups – across both ESG and non-ESG funds – the Prime ranks in the top 20 percent while Systematic is in the top 5 percent.
4. What gives you a competitive advantage?
We are currently unique among fund managers in how we integrate nonfinancial ESG data with quantitative investment strategies to achieve returns, and will, I believe, be well placed in the industry as greater demand emerges for low-volatility, sustainable investment products.
The days of “risk-free” 7 percent fixed income returns in a falling interest rate environment have disappeared. It is now about “swimming against the current” of rising interest rates. Many investors will face a long period of negative mark-to-markets and a lack of investment opportunities. Global liquid equity is the only realistic alternative, provided the higher volatility can be managed effectively. To us, equity is the new fixed income. Building a diversified, transparent equity exposure with risk-controlled downside and integrating nonfinancial information as a forward-looking analysis in a quantitative framework is a new style of asset management that we call “ESG Quant.” It is the key to sustainable investing, defined as long-term superior investment returns.
5. Do you intend to offer this advantage to the retail marketplace, so that everyday “main-street” investors can participate? If so, how and when?
We are certainly passionate about making Arabesque’s sustainable investment strategy available to all investors and the wider market, a key reason why a UCITS IV (basically a type of mutual fund offered out of Luxembourg) compliant vehicle was chosen as an umbrella fund for Arabesque Prime and Systematic.
Historically, stock selection using algorithmic models was mainly available only to hedge funds and bespoke investment strategies managing institutional money. Arabesque is committed to making this “ESG Quant” investment strategy available to socially aware retail investors, where there is an ever-growing demand for ESG products. Smart sustainable investing should be transparent and accessible for the man/woman on the street and not just large financial institutions.
As demand grows for sustainable investment strategies from the retail market, it will in turn drive further progressive change in how companies integrate ESG factors into their decision making and reporting and thus throughout the very way the company is managed. We are at the curve of something very exciting.
6. Can investors help make the world more sustainable? If so, what has to happen for this to be realized?
It is clear that there is now an additional dimension to investing – a double bottom line, as I describe it. By that I mean that it is no longer good enough for investments to yield a return. Today, people care more than ever before about how, precisely, financial return is made, and investments that are sustainable represent the future. It’s a long game, but that’s clearly the way we are moving.
To date, one of the key drivers of the growth in ESG-based investment has been demand from asset owners, from pension funds to sovereign wealth funds and foundations. As far back as 2010, a report by the Social Investment Forum Foundation revealed that over 80 percent of U.S. asset managers saw client demand as the main reason for integrating ESG data in investment decisions.
The sleeping giant that is the retail market will be instrumental in transforming global asset management, pushing ESG further into the mainstream through demand for accessible, sustainable products.
Awareness of ESG information as a critical factor in the investment process will only continue to spread and, as it does so, more and more investors will view sustainable investing as the new norm. And as equity will inevitably capture some of the fixed-income money, we will notice investors talking about risk sharing instead of risk transferring, which is what ESG is all about. Our aim is to create a new investment style of the ESG quant fund. As more and more money comes into this style, companies and investors will benefit. Equally importantly, so will all of society.
