Ossiam has launched the Ossiam ESG Low Carbon Shiller Barclays CAPE US Sector UCITS ETF (5HEE GY) on Xetra. The actively managed fund aims to deliver a risk/return profile similar to the existing Shiller Barclays CAPE US Sector Value Index, but with a significantly reduced carbon footprint and improved ESG profile.
The fund uses active management to reduce the carbon footprint of its portfolio.
The index strategy, developed jointly by Barclays and Nobel Prize-winning economist Professor Robert Shiller, uses the cyclically adjusted price-to-earnings (CAPE) ratio as a valuation driver in a sector rotational strategy.
The ratio is calculated by dividing the current market value of a group of companies’ shares by their average, inflation-adjusted earnings over ten years. By comparing this figure to historical averages of other groups, the ratio provides insight into how the companies are relatively valued.
In terms of the index methodology, the CAPE metric has been extended to measure the relative value of equity sectors. The ratio compares the current value of a portfolio of companies in a sector to inflation-adjusted aggregated earnings of its constituents averaged over ten years to remove the effects of business cycles. Through this, the index attempts to identify and favour those sectors which are undervalued and avoid those sectors which are overvalued.
There is a risk that some undervalued companies will not perform well over time, as some may be destined to stay undervalued or perhaps even fall in value if the underlying fundamentals of the business deteriorate. In order to avoid these companies the index applies a momentum filter to identify those which appear to be rising in value. The output of this methodology should be a portfolio with a value bias that aims to pick the right sectors at the right point in time.
The new fund selects its constituents from the above index universe, using an actively managed overlay to enhance the ESG profile of the ETF.
The strategy starts by removing companies in specific businesses, such as controversial weapons, tobacco and coal, companies that undergo severe controversies, and companies in breach of the UN Global Compact Ten Principles. The fund also incorporates publicly-available exclusion lists offered by large, highly-regarded Scandinavian institutional investors.
With the remaining stocks, the fund’s manager selects the portfolio that mimics the Barclays Shiller CAPE US Sector Value Index and minimises the expected tracking error. It then reduces its carbon footprint, while keeping the same sector exposure of the original index.
The carbon footprint reduction is three-fold: 40% reduction in the total greenhouse gas emissions, 40% reduction in the total potential greenhouse gas emissions from reserves, and 40% reduction in the carbon intensity of the strategy compared to the original index.
Ossiam’s passively managed non-ESG Shiller CAPE strategy – the Ossiam Shiller Barclays CAPE US Sector Value TR UCITS ETF (UCAP LN) – has proven to be popular with investors, crossing the $1 billion assets under management threshold in June 2017. The new fund offers a means for investors to tap into the strategy’s market-beating returns (since inception in June 2015, UCAP’s index has returned 45.4% compared to 32.2% for the S&P 500) while adopting a sustainability investment mandate.
Investing ethically does come at a cost however with the fund’s total expense ratio of 0.85% being notably higher than the fees of 0.65% currently charged by UCAP. Income generated within the fund’s portfolio is treated as accumulating.