TOBAM’s Choueifaty reworks the sustainability theme
TOBAM Asset Management is taking the idea of sustainable investment back to its roots in response, it says, to the way the the concept is being increasingly stretched.
In 2010, Paris-based TOBAM Asset Management signed up for the United National Principles for Responsible Investment (UNPRI), a code of conduct that obliges signatories to publish a report each year detailing their social investment activities.
The manager counts CalPERS, the California Public Employees’ Retirement System, as a significant shareholder (12.5%).
In addition, a ‘significant’ slice of TOBAM’s revenue is donated each year to Amnesty International in France, and in 2010-2011, the firm compensated 125% of its annual carbon footprint. All employees are shareholders and TOBAM’s compensation structures are highly transparent.
The meaning of sustainability
These and other measures demonstrate a strong and active support of the feel-good principles of sustainable investing. However, TOBAM Founder Yves Choueifaty (pictured) has redefined the term with a sharper edge, and a more accurate way.
Sustainability, he explains, means embedding responsible real returns (growth) achieved by innovative investing over the long term. ‘Responsible’ means respecting the whole investment process, starting with the clients, your own work, the resources used and the wider environment.
In fact, Choueifaty sees no point in doing anything else. “There is no sense in anything other than sustainable investing. Why would you even start something that is not sustainable? We don’t talk of the short term because it is simply not sustainable, so it is a waste of time.”
The rapid growth of assets under management at TOBAM indicates that Choueifaty’s view is winning converts. He is a frequent public speaker and contributes to academic journals. Think-tanks explain his Diversification Ratio, which diversifies the portfolio around sources of risk, rather than market capitalisation.
His logic is simple and relentless. He relates how he asks audiences: Can you tell the future? If you can, there is an implicit response: there is no need at all to diversify. You should put everything you have into that one absolute certainty. But if you can’t tell the future, logically you have to diversify.
Taking that as a basis for everything he does, Choueifaty has evolved TOBAM’s patented Anti-Benchmark strategies based on maximum diversification for long term returns.
The firm, with some €3.4bn in assets under management (a rise of 54% in 2012 alone) now runs 13 such strategies, the latest focused on Canada, after funds targeting Pacific ex-Japan (now at $50m) and Emerging Market Equities ($500m) were brought to the market in 2012 and 2011.
The anti-benchmark solution is based on the conviction that market capitalisation weighted indices are dangerous for investors, or “not sustainable”. As demonstrated in the financial sector in 2008, tech/IT stocks in 2000 and oil in the 1980s, market-cap investing concentrates risk over time and leads to biases in precisely the sectors and stocks that should be avoided.
The strategies are implemented through a series of steps. First, quantitative research is carried out applying the anti-benchmark theory. Second, a liquidity filter and an optional socially responsible investment (SRI) filter are applied. Third, the portfolio is optimised using the algorithm that generates optimal stock weightings. Finally, internal limits and Ucits limits are applied alongside client guidelines.
“Diversification returns come from the corporate, not the manager,” he explains.
“We try not to pollute the risk premium which the equity is delivering.” The portfolio model is neutral and returns come from the holdings. “And by the way,” he adds, “there is this pervasive confusion between being passive and being neutral. But if you are passive, you are certainly not neutral.”