ESG has triggered a move towards transparency and the market is catching the mood, Motif

Following the launch of the latest Goldman Sachs structured notes linked to Motif Capital's Aging of America 7 ER Index and National Defense 7 ER Index in late June, SRP spoke to the firm's chief executive Hardeep Walia (pictured) about Motif's track record after one year of existence, the firm's philosophy around ESG investing and what factors differentiate its offering in the institutional investor segment.

One year on
"2016 was a remarkable year for Motif," says Walia, highlighting that the firm has raised over US$126m from Tier 1 venture capitalists and strategic investors including Goldman Sachs, JP Morgan, Balderton Capital and Ignition, among others.

According to Walia, products offered by Motif include retail brokerage, digital wealth, IPO distribution, advisor platform, institutional platform, thematic structured notes, annuities and separately managed accounts (SMAs); while its client base is comprised by over 350,000 retail customers and a number institutional clients such as Goldman Sachs, US Bank and Global Atlantic.

"We have three business lines including a retail brokerage, an institutional advisory (where we partner with companies like Goldman Sachs to build products such as structured notes) and an underwriting business through which we participate on IPOs and offer shares direct to individual investors," says Walia. "Our research on the retail brokerage products shows that investors are seeking to use thematic models to invest."

Motif has surveyed over 120,000 of its clients which the firm calls 'motifers' and it was "pretty surprised" to find that investors are now asking where their money is going and how they can make sure their investments are in line with what they believe around social, and environmental issues.

The research also found that 83% of those surveyed said their 'personal values' were key when making investment decisions; 42% said they were able to figure it out themselves and invest consistently with their values; while 72% had no idea where they were investing in.

"Trump dominated the agenda in 2016 and these results reflect this is a Trump phenomenon," says Walia. "These results were the basis for the launch of 'Motif Impact', an automated investment tool where you can build wealth models. For this, we partnered with MSCI to use their ESG data so that investors can screen out those stocks that are not consistent with their values."

According to Walia, these asset models are put together using Motif's building blocks versus ETFs and mutual funds, "so we get a Motif tradable basket of stocks [with which] you can build seven different asset models that exclude the assets investors don't want in their portfolios."

"This was an accidental product and one that came out on the back of this survey," says Walia. "We call it 'personal values' because there is no USDA-type agency that certifies the product as organic and there is a lot of confusion in this segment."

Walia believes that just because you brand a product ethical it doesn't mean that the product is actually ethical. "Our aim was to give individual investors a chance to highlight what their values are and if they disagree with the MSCI data they can change it and tweak it," says Walia. "The model is very simple and investors can trade as much as they want, and it doesn't cost them anything. This model allows investors to customise their investment views and deploy them via a tradable product."

According to Walia, the firm's philosophy is that "everything we do has to be data driven" so when it comes to something like values "which is in the eye of the beholder we wanted to be able to quantify in a very systematic way" and MSCI provided just that.

ESG
"There is still a lot of confusion in the market and it is important that we get this right because retail and institutional investors have come a long way and they are now a lot more inquisitive about their investments," says Walia, adding that the reality is that this has been an ongoing trend in the institutional space since 2016 when the polarisation in the country resulted in people wanting to make sure that their money would not end up on the other side. "So a teacher wanted to make sure that his pension was not invested on anything that would support child labour or arms trade. These things are not trivial or easy to find out (ie. one out five cell phones are a product of child labour)."

This has triggered a move towards transparency and the market is catching the mood, according to Walia. "You see it in the consumption as people are willing to pay more for products that are in line with their ESG values," says Walia.

The problem today, points Walia, is that there are many products out there claiming they are 'green' or 'sustainable' and they have higher fees than other traditional funds. "But we don't really know what's in them," says Walia. "Transparency in this segment is an issue. In this context, we wanted to have a very transparent model that could be customisable so that investors can make adjustments if they disagree with the allocation. In a politically charged environment, ethical considerations are important and investors want to know if for instance their money is invested in companies that support anti-abortion policies, and so on."

One of the myths around ESG (and SRI before) is that these products don't deliver but most index providers offering ESG strategies are now publishing performance numbers and that "is getting people's attention", according to Walia.

"We are very keen in taking a fresh approach to ESG and we have developed a model where 'what you see is what you own' and if you don't like what you're seeing you can change it," he says. "We believe that approach complements with our thematic model, and lends itself to a very intuitive way of investing for retail investors."

As a guarantee to show investors that the firm is fully behind its models and that value investing is not about giving up performance, Motif will pay back all the fees if after applying one of its value filters or tilts to its base portfolio it underperforms by more than 1% against a non-values benchmark.

Institutional business
By leveraging on the firm's technology Motif has developed a "very tailored model to differentiate ourselves in the market" and to give institutional investors custom solutions that can be managed via coding.

"For instance, we are starting to look at how we can apply similar ESG filters and tilts to our core thematic models which we are now offering in the institutional segment," says Walia. "The difference is that we have the ability to deploy models in a very standard way but also to deliver customisable versions thanks to our technology-based approach, and that has its appeal in the institutional segment."

Motif has unique insights that don't follow traditional classifications, according to Walia. "This also allows us to source interesting opportunities and ideas," he says. "For most of our Motifs there is no equivalent model out there."

Another element that sets Motif apart is that it uses objective rules-based data-driven methodology to extract data not only from conventional sources but also unconventional (how many engineers are attending a particular conference? Are they Google or Microsoft employees?), according to Walia.

"This approach gives us a unique set of data, which we can then deploy for instance via an FDIC protected CD without any human bias," says Walia. "In addition, we can take these general models and make them very specific."

Walia notes that the firm recently signed up a family office of a fintech entrepreneur. "The portfolio is based on nine core themes within a core equity holding and you can deploy those themes in a structured note and separately managed account (SMA) or an annuity," says Walia. "We have the ability to use any of our models or a combination of them and deliver them on any wrapper. In this case, because the portfolio is overweight on specific tech companies and the investor wanted to have a more general exposure we use one of our customs versions to achieve that."

All of this can be done with a very small human team (five people), says Walia. "We don't have hundreds of researchers but because everything is automated we can deliver this by just writing code," he says. "All our employees are Wall Street engineers and quantitative researchers that are experts in data mining. When it comes to optimisation for rebalancing all that happens automatically."

SRP data shows that Goldman Sachs has marketed 36 structured notes linked to the two Motif's flagship indices, year to date, of which 33 are still live.

Motif Capital's Aging of America 7 ER Index is comprised of US exchange-listed stocks of companies in the health care and real estate sectors that derive at least 10% of their revenue (and in some cases up to 100% of their revenue) from products and services that may benefit from the long-term demographic shift towards an older population in the United States.

Motif Capital's National Defense 7 ER Index is comprised of US exchange-listed stocks of companies in six sub-industries within the industrials and information technology sectors that derive at least 10% of their revenue (and in some cases almost all of their revenue) from defence-related sales that may benefit from increased defence-related spending by the United States and foreign governments

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