In a Q&A, Peter Zangari (pictured), global head of research and product development, MSCI, spoke to SRP about the trends for this year, the dramatic rise of environmental, social and governance (ESG) investing, the use of machine learning technologies, and his views on structured products.
What themes are driving activity this year?
Peter Zangari: Factor investing or smart beta is a strong trend in the industry. Clients want to get access to different factors for different vehicles. You have got the ETF vehicle, you have structured products, you have direct replication of indexes, that is an ongoing trend.
The thematic indices, of which decrement is one example, remain popular. There are different indexes that tend to capture a particular theme in the market place, whether it is aging population, whether it is around health care, robotics and so on. There is no fundamental investment thesis necessarily associated with it, it is more about themes were clients want to get exposure to.
Are you working on, or developing any specific ideas and products?
Peter Zangari: Our product agenda is always evolving. We are actively engaged in the use of artificial intelligence and machine learning, in creating indexes, in creating risk models, that is something that our clients asked us about.
For example, for ESG we are using machine learning technologies to help identify so called ESG key issues. We read 10-Ks in the US, which is public company reporting. We read those electronically. We scan thousands of pages in seconds and then we also use that to identify key ESG issues for companies, data privacy issues, use of water issues and so on. AI and research is an area we are definitely focussing on.
There is a lot of noise around ESG. Is this segment really driving significant sales?
Peter Zangari: Growing financially or economically is one thing, but just how it is in the market right now, when I meet with clients all over the world, ESG is one of the top three topics that always comes up. For the last year, in my meetings with CIOs, CROs, they want to hear about AI and how we are using it, they want to hear about ESG, and depending on where you are in the world, clients want to understand how they should be thinking about ESG and incorporating it or better ways of integrating ESG in the investment process.
How do you integrate ESG in your solutions?
Peter Zangari: From an asset allocation approach, what we do at MSCI, we integrate ESG considerations directly into the index, into the benchmark. Once it is at the policy, at the top of the allocation, all further allocations should reflect ESG to the extent that you want to stay aligned with those benchmarks.
Clients who are interested in both factors and ESG want to know how they can productively, in a consistent way, integrate factor and ESG into the investment process. They want factor exposure because they want to take a bet on quality, on momentum, on value, on minimum volatility. They want to continue to gain access to that risk, but they also want to make sure that the portfolio they are building achieves a certain level of ESG quality. Factor is more on the return side while ESG is more on the risk side. If you are going to take risk it should be associated with return as well.
Are retail investors shifting towards ESG products or is it a segment mainly driven by institutional investors?
Peter Zangari: In wealth management for sure. In fact we recently did business with a wealth manager who services high-net worth clients and they bought our ESG ratings so that they can put those ratings on their platform. That way, when they put a portfolio together for an individual, that client can see how those companies whose stocks they are selecting look from an ESG perspective.
Is performance an issue with ESG investing?
Peter Zangari: Performance is always depending on many variables, but what we demonstrated with our research that you can build portfolios that tilt towards ESG – and depending on the time period – and possibly improve performance. What we found that it is not so much the ESG rating, like the higher the rating, the higher the performance. Sometimes, what we call ESG momentum, which is companies whose ESG rating is increasing, tend to do better than companies whose ESG rating is decreasing.
Do you see structured products as an efficient way to deliver index-linked strategies?
Peter Zangari: Structured products are another vehicle, for sure. Depending on the structuring. There are ETFs built on our indexes, structured products built on our indexes. It is a niche market for us but we see growth in that area because practically speaking it is another way for investors to get access to risk via structured products in a customised way. MSCI often serves the basis for that structured product in terms of how you define the universe or index.