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"Strict ESG criteria and above-average performance are not mutually-exclusive."
Date:
09. July 2024
A highly flexible investment strategy integrated with an innovative sustainability approach – this is the concept behind the Pax ESG Multi Asset public fund, which Pax-Bank launched with its partner Verida Asset Management (Verida) in 2022.
But does this concept work?
"Yes," say Gregor Kuhl, Head of Asset Management at Pax-Bank, and Dr Björn Borchers, founder and CEO of Verida Asset Management.
Gregor Kuhl: As the name implies,we invest globally across different asset classes, but primarily maintain a balanced allocation between equities and bonds. Our portfolio management is guided by a long-term equity allocation target of 60 percent, which is actively adjusted within a certain range based on market conditions.
Additionally, we selectively employ extra income strategies such as covered call writing on stocks with listed options. The goal is to generate an attractive annual distribution while controlling risk. Moreover, the fund has a strong sustainability profile.
What characterises your sustainability concept?
Gregor Kuhl: As a Christian-led sustainable bank, it was important for us to strengthen the social profile in addition to the environmental aspect of our sustainability concept. Therefore, the fund's sustainability strategy is based on three pillars. Firstly, we select companies with above-average ESG ratings. Secondly, we include companies with a positive percentage change in their ESG scores. Finally, we invest in companies that rank in the upper range of the Social Score Benchmark.
Dr Borchers, how do you ensure that the selected securities meet your sustainability criteria?
Dr Björn Borchers: The foundation is the ethical-sustainable exclusion criteria of Pax-Bank. These criteria consider environmental aspects such as coal mining, factory farming and green genetic engineering, as well as social criteria and corporate governance.
Only securities that pass this strict filter are shortlisted. Subsequently, detailed analysis of the companies is conducted using a methodology developed by Verida, based on MSCI ESG Research. In addition to the applied exclusions, the available sustainability metrics for each area are utilised in portfolio construction to identify specific characteristics in line with the aforementioned "three-pillar strategy."
What does this mean for the three-pillar strategy?
Dr Björn Borchers: In the first pillar – companies with above-average ratings – the classification is based on the current sustainability profile. We prefer companies with AAA, AA and A ratings.
In the second pillar, we aim to identify companies with a positive trend in sustainability metrics and the potential for top ratings. For this, we primarily examine the medium-term dynamics.
Finally in the third pillar, the social score must be in the upper mid-range. This strategy represents a new, innovative approach in the field of sustainability. Additionally, historical analysis shows that this methodology has a low correlation with traditional ESG strategies. Therefore we believe it is a good addition to an institutional portfolio.
How is the portfolio specifically composed?
Dr Björn Borchers: Currently, about 75 percent of the equity allocation comes from North American companies, 16 percent from European companies, and 9 percent from the Pacific region (as of 31 May 2024). The granular composition, with more than 100 individual securities, provides us with high flexibility and offers investors broad diversification. Most of the bonds are European corporate bonds, focusing on dividends and coupons. When appropriate, we also include bonds from emerging markets and high-yield bonds.
Gregor Kuhl: A crucial success factor is the active and dynamic management of the equity allocation and, in particular, the interest rate duration. This approach allows us to respond precisely to varying market conditions. Our goal is to achieve market-aligned performance with calculated risk and to target annual distributions of 2.5 percent or more.
How close have you come to achieving your goal?
Gregor Kuhl: Due to the challenging market conditions at the fund's launch in 2022, our strategy was tested right from the start. Since then, performance has developed very favourably.
With an annual performance of 19.5 percent (AK I) in 2023, we outperformed comparable market developments. This positive trend continued in 2024 with a return of 5.75 percent (AK I), resulting in a total return of 22.00 percent (AK I) since the fund's launch in 2022.
The distribution in the institutional tranche for 2024 is 25 euros per fund unit, roughly corresponding to the targeted 2.5 percent. Therefore, since its inception, the Pax ESG Multi Asset has demonstrated that above-average performance and intensive sustainability are not mutually exclusive.
A summary of your investor rights can be found at www.universal-investment.com/en/Corporate/Compliance/Investor-Rights. In addition, we would like to point out that Universal Investment may, in the case of funds for which it has made arrangements as management company for the distribution of fund units in other EU member states, decide to cancel these arrangements in accordance with Article 93a of Directive 2009/65/EC and Article 32a of Directive 2011/61/EU, i.e. in particular by making a blanket offer to repurchase or redeem all corresponding units held by investors in the relevant member state.
