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Key Takeaways

  • Ossiam’s ESG Shiller strategy1 takes a straightforward and proven methodology and adds to it a transparent, comprehensible ESG overlay.
  • Ossiam combined its smart beta know-how and ESG expertise to create an ESG version of the high-performing Shiller Strategy2, significantly reducing the carbon impact of the portfolio.
  • Over the long-term, the Shiller Strategy has proved its worth, and over a shorter timeframe the ESG overlay has added considerable value. That value, given economic, social and investment trends around sustainability, could persist.
The CAPE® ratio, developed by the Yale economist professor Robert J. Shiller, has proved its effectiveness beyond all reasonable doubt.

US stocks returned a healthy 10.18% a year3 on average from 2002 to 2019, but over the same period the Shiller strategy, implementing this ratio, outperformed US stocks by more than 3% a year.

Given this sizeable outperformance, some investors might be willing to sacrifice a small part of the upside for an ESG-friendly version of the strategy. But they would not need to. The evidence to date shows that a low carbon version of the strategy has only increased the outperformance.

So what is the Shiller strategy and how does ESG integration impact its risk profile and returns?

Constructing a Sector-Rotation Portfolio
Robert Shiller, who received the Nobel Prize in Economics for its empirical analysis of asset prices, is the architect of the CAPE® (cyclically-adjusted price to earnings) Ratio. This ratio, now widely known as the Shiller P/E, is calculated by dividing a market index price by the average of the index's earnings for the last ten years, adjusted for inflation.

The relationship between the CAPE® ratio and long-term returns from the stock market is robust. In essence, if CAPE® indicates that the market is expensive long-term returns will tend to fall, and vice-versa.

The Shiller Strategy, which serves as a starting point for the Ossiam’s strategy, has adapted this ratio to identify the five most undervalued sectors in the S&P 500. Of these five, the one with the lowest momentum over the last twelve months is removed to avoid a potential value trap (whereby a cheap sector just keeps getting cheaper). The index then equally weights the four remaining undervalued sectors and rebalances them monthly.

The strategy is very easy to understand which is why investors like it,” says Tristan Perret, co-head of investment management and research at Ossiam, the smart beta specialist affiliate of Natixis Investment Managers. “What you get is a sector rotation strategy based on a valuation metric, which is very different from traditional value strategies.”

What you also get is returns of more than 13% a year on average over nearly two decades.

ESG Overlay Increases Performance
Given investor demand for ESG investments, Ossiam decided to combine its smart beta know-how and its ESG expertise to create an ESG version of its successful Shiller Strategy. The aim was to significantly reduce the carbon footprint of the portfolio.

Two discrete components feed into the ESG version of the strategy. The first component takes the sector selections from the Shiller Strategy and removes stocks which are categorised as “controversial”. Typical exclusions relate to controversial weapons, tobacco or thermal coal. It also removes stocks that are in breach of one of the Ten Principles of the UN Global Compact, which commits signatories to implement universal sustainability principles. In the utility sector, companies which derive more than 20% of their electricity production from thermal coal are also removed. Finally, it removes companies that undergo severe controversies (such as environmental incidents or governance incidents like corruption or money laundering).

So the first component excludes a number of companies and therefore reduces the size of each sector. The second component takes these reduced-sized sectors and optimises them to reduce carbon footprint. “We have set an ambitious goal of a 40% reduction in total greenhouse gas emissions, carbon intensity and potential emission from reserves,” says Perret.

The two-step process has had a remarkable impact on the performance of the strategy. Whereas the US equity version of the Shiller Strategy already outperformed the S&P 500 by more than 1% last year, the ESG integration added a further 6% to returns. The first component, which excludes controversial companies, added around 2% of performance, while the optimisation to improve the carbon footprint of the portfolio explains the remaining 4% of outperformance.

Was ESG Outperformance in 2020 an Anomaly?
Let it be said that 2020 was an unusual year. Buoyed by stay-at-home-stocks, ESG themes surged and outperformance by the two components of Ossiam’s ESG Shiller Strategy was continuous throughout the year.

The outperformance of the tech sector was accelerated in Ossiam’s ESG Shiller Strategy by the exclusion policy, which removed stocks such as Alphabet and overweighted Netflix, Adobe and Twitter, all even more impressive performers.

The optimisation component came through strong too, by excluding high carbon emitting companies such as airlines, which suffered from the economic impact of the pandemic.

The big question is: will the ESG overlay continue to outperform in “normal” markets?

“The crisis made the outperformance of ESG more extreme,” says Perret. “But there are longer-horizon trends that ESG strategies should continue to benefit from.” These include excluding or underweighting oil stocks, as the oil industry starts to see significant write-downs of the value of reserves. “Those write-downs have long been predicted by low carbon approaches,” says Perret.

Taking into consideration climate change will be a leading indicator of portfolio outperformance in the future, he believes. “You don’t know when and you don’t know how and exactly by how much, but the trend is entrenched and ESG will likely add substantial value.”

And even if ESG is not always a source of alpha in every period, it will likely be a source of protection versus downside risk, protecting portfolios from drawdown as unsustainable corporate practices are punished by regulators and investors.

The Value of Simplicity
Just occasionally an investment strategy is simple to understand, simple to invest in and also outperforms. Ossiam’s ESG Shiller Strategy takes a straightforward and proven methodology and adds to it a transparent, comprehensible ESG overlay.

Over the long-term, the Shiller Strategy has proved its worth, and over a shorter timeframe the ESG overlay has added considerable value. That value, given economic, social and investment trends around ESG, could persist.

Written in May 2021
1 The Ossiam’s ESG Shiller Barclays CAPE US Sector Value.
2 The Shiller Barclays CAPE US Sector Value.
3 As represented by the S&P 500 NTR.

Past performance is not indicative of future results.

Barclays Bank PLC and its affiliates ("Barclays") is not the issuer or producer of the Ossiam Shiller Barclays CAPE® US Sector Value TR, the Ossiam Shiller Barclays CAPE® Europe Sector Value TR or the Ossiam ESG Low Carbon Shiller Barclays CAPE® US Sector UCITS ETF (collectively, the "Products") and Barclays has no responsibilities, obligations or duties to investors in the Products except in connection with their distribution pursuant to an agreement with Ossiam. The Shiller Barclays CAPE® US Sector Value Net TR index and the Shiller Barclays CAPE® Europe Sector Value Net TR index (collectively, the "Indices") are trademarks owned, or licensed for use, by Barclays Bank PLC and are licensed for use by Ossiam Lux and/or Ossiam IRL as the "Issuer(s)" of the Products. While Ossiam Lux and/or Ossiam IRL, as the Issuers of the Products, and for their own account, execute transaction(s) with Barclays in or relating to the Indices in connection with the Products, investors acquire the Products from Ossiam Lux and/or Ossiam IRL and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Barclays upon making an investment in the Products. The Products are not sponsored or endorsed by Barclays and Barclays makes no representation regarding the suitability or advisability of the Products or use of the Indices or in any data included therein except in connection with their distribution pursuant to an agreement with Ossiam. Barclays shall not be liable in any way to the Issuer, investors or to other third parties in respect of the use or accuracy of the Indices or any data included therein.

The Shiller Barclays Indices have been developed in part by RSBB-I, LLC, the research principal of which is Robert J. Shiller. RSBB-I, LLC is not an investment advisor, and does not guarantee the accuracy or completeness of the Shiller Barclays Indices, or any data or methodology either included therein or upon which it is based. Neither RSBB-I, LLC nor Robert J. Shiller and its consultant, IndexVestLAB, LLC and consultants thereto, shall have any liability for any errors, omissions, or interruptions therein, and makes no warranties, express or implied, as to performance or results experienced by any party from the use of any information included therein or upon which it is based, and expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect thereto, and shall not be liable for any claims or losses of any nature in connection with the use of such information, including but not limited to, lost profits or punitive or consequential damages, even if RSBB-I, LLC or any of such other said parties is advised of the possibility of same.

Bloomberg Index Services Limited (formerly known as Barclays Risk Analytics and Index Solutions Limited) is the official index calculation and maintenance agent of the Shiller Barclays CAPE® Europe Sector Value Net TR index and the Shiller Barclays CAPE® US Sector Value Net TR index, an index owned and administered by Barclays (the “Index”). Bloomberg Index Services Limited does not guarantee the timeliness, accurateness, or completeness of the Index calculations or any data or information relating to the Index. Bloomberg Index Services Limited makes no warranty, express or implied, as to the Index or any data or values relating thereto or results to be obtained therefrom, and expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect thereto. To the maximum extent allowed by law, Bloomberg Index Services Limited, its affiliates, and all of their respective partners, employees, subcontractors, agents, suppliers and vendors (collectively, the “protected parties”) shall have no liability or responsibility, contingent or otherwise, for any injury or damages, whether caused by the negligence of a protected party or otherwise, arising in connection with the calculation of the Index or any data or values included therein or in connection therewith and shall not be liable for any lost profits, losses, punitive, incidental or consequential damages.

This material has been prepared solely for informational purposes only and it is not intended to be and should not be considered as an offer, or a solicitation of an offer, or an invitation or a personal recommendation to buy or sell participating shares in any Ossiam Fund, or any security or financial instrument, or to participate in any investment strategy, directly or indirectly. It is intended for use only by those recipients to whom it is made directly available by Ossiam. Ossiam will not treat recipients of this material as its clients by virtue of their receiving this material. All performance information set forth herein is based on historical data and, in some cases, hypothetical data, and may reflect certain assumptions with respect to fees, expenses, taxes, capital charges, allocations and other factors that affect the computation of the returns.

This information contained herein is not intended for distribution to, or use by, any person or entity in any country or jurisdiction where to do so would be contrary to law or regulation or which would subject Ossiam to any registration requirements in these jurisdictions. This material may not be distributed, published, or reproduced, in whole or in part.

Additional Notes
This material has been provided for information purposes only to investment service providers or other Professional Clients, Qualified or Institutional Investors and, when required by local regulation, only at their written request. This material must not be used with Retail Investors.

In the E.U. (outside of the UK and France): Provided by Natixis Investment Managers S.A. or one of its branch offices listed below. Natixis Investment Managers S.A. is a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of Natixis Investment Managers S.A.: 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. Italy: Natixis Investment Managers S.A., Succursale Italiana (Bank of Italy Register of Italian Asset Management Companies no 23458.3). Registered office: Via San Clemente 1, 20122 Milan, Italy. Germany: Natixis Investment Managers S.A., Zweigniederlassung Deutschland (Registration number: HRB 88541). Registered office: Im Trutz Frankfurt 55, Westend Carrée, 7. Floor, Frankfurt am Main 60322, Germany. Netherlands: Natixis Investment Managers, Nederlands (Registration number 50774670). Registered office: Stadsplateau 7, 3521AZ Utrecht, the Netherlands. Sweden: Natixis Investment Managers, Nordics Filial (Registration number 516405-9601 - Swedish Companies Registration Office). Registered office: Kungsgatan 48 5tr, Stockholm 111 35, Sweden. Spain: Natixis Investment Managers, Sucursal en España. Serrano n°90, 6th Floor, 28006, Madrid, Spain. Belgium: Natixis Investment Managers S.A., Belgian Branch, Gare Maritime, Rue Picard 7, Bte 100, 1000 Bruxelles, Belgium.

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The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. The analyses and opinions expressed by external third parties are independent and does not necessarily reflect those of Natixis Investment Managers. Past performance information presented is not indicative of future performance.

Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information. This material may not be distributed, published, or reproduced, in whole or in part.
All amounts shown are expressed in USD unless otherwise indicated.

Ossiam
An affiliate of Natixis Investment Managers
French société anonyme governed by an executive board and a supervisory board
with a share capital of 270 805 €
RCS Paris – 512 855 958
6 place de la Madeleine, 75008 Paris
www.ossiam.com

Natixis Investment Managers
RCS Paris 453 952 681
Share Capital: €178 251 690
43 avenue Pierre Mendès France
75013 Paris
www.im.natixis.com

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