London-based investment boutique European and Global Advisers (EGA) has teamed up with Cité Gestion to introduce a systematic long-short Ucits fund aiming to “generate positive returns from the strongest and weakest governed companies in the S&P 500.”
Based in Ireland, the Plurima Market Neutral Ucits Fund adopts long positions in the index’s top 100 well-governed companies while shorting its bottom 100 poorly governed companies, determined by the stewardship model from governance analysts Green Blue Invest, the ESG brand of Cité Gestion SA.
Corporate governance, responsible business and investment trends
The model, which excludes tobacco, defence and oil & gas companies on its long positions, uses AI and natural language processing to rank the quality of companies’ governance based on analysis of their 10-K reports.
According to the asset manager, evidence has shown a correlation between senior executives’ language and corporate governance and company culture quality in the model developed with Swiss-based Stewardship & Governance Associates.
Using a proprietary dictionary of 8,000 keywords, the model scans corporate communications, such as 10-K filings and reports submitted to the Securities and Exchange Commission, for the frequency and usage of negative and positive words.
Using these metrics, companies receive a core stewardship score. High-scoring companies typically exhibit characteristics such as prioritising employee welfare, exercising prudence and emphasising R&D. Conversely, companies with lower governance rankings tend to underperform.
“The Plurima Market Neutral Ucits Fund will be long 100% of the top 100 stocks ranked by the stewardship score, and short 80% of the bottom 100 stocks, giving a net long exposure of 20%,” shared the investment manager. The portfolio composition would be rebalanced annually, with weightings rebalanced quarterly, it added.
Mattias Eriksson, partner at EGA, commented: “Applying a quantitative approach to assessing governance quality allows the fund to systematically generate alpha from the best and worst managed companies in the S&P 500.”
Pascal Botteron, CIO of Green Blue Invest and head of investments at Cité Gestion Private Bank, said: “The majority of ESG funds focus on the ‘E’, but our research shows that well-governed companies deliver positively not only on the ‘G’ but also on the ‘E’ and the ‘S’. Our academic model dynamically adjusts to changes in corporate language to ensure it is exposed only to the best and worst managed companies in the index.”
