EGA and Cité Gestion partner to launch long-short fund targeting best and worst US corporate governance
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.
Over 15 years of evidence the model, developed through Green Blue Invest's partnership with Swiss-based Stewardship & Governance Associates (SGA), has demonstrated that the language used by senior executives is indicative of the quality of corporate governance and company culture.
Using a proprietary dictionary of 8,000 key words, the model screens for the occurrences and use of negative and positive words in corporate communications such as 10-K filings, comprehensive annual reports companies are required submit to the Securities and Exchange Commission.
Using these metrics, companies are assigned a core stewardship score, which determines the quality of their governance. Companies that score highly tend to share certain characteristics, including concern for employee welfare, prudence, and a focus on R&D, which generate more shareholder value.
Conversely, companies ranking the lowest in terms of governance tend to underperform. Combining the paper trading and live track record, the average gross underperformance generated by the model is in excess of 5% per annum.
The investment team has been running a long-only version of the strategy for five years, over which time it has outperformed the S&P 500 Total Return Index by more than 35% since its inception on February 20, 2019.
The PLURIMA Market Neutral Fund will be long 100% the top 100 stocks ranked by the stewardship score, and short 80% the bottom 100 stocks, giving a net long exposure of 20%.
The composition of the portfolio will be rebalanced on an annual basis, with weightings rebalanced quarterly.
Mattias Eriksson, Partner at EGA, said: "Governance is at the heart of company performance and applying a quantitative approach to assessing its quality allows the fund to systematically generate alpha from the best and worst managed companies in the S&P 500.
"Partnering with Cité Gestion and Green Blue Invest means we can leverage the expertise of industry leading ESG practitioners to offer wealth managers targeted exposure to the characteristics that are an important and sustainable forward-looking source of outperformance."
Pascal Botteron, CIO of Green Blue Invest and Head of Investments at Cité Gestion Private Bank, said: "The vast 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 systemically harvests this governance premia and dynamically adjusts to changes in corporate language to ensure it is exposed only the best and worst managed companies in the index.
"We are delighted to collaborate with Mattias and Ebrahim to offer EGA clients exclusive access to a long-short version of the model in a UCITS format."
About European and Global Advisers LLP
EGA LLP (www.egallp.com) was formed in 2011 as an independent, privately owned, investment boutique to provide specialist, niche market funds for institutional investors and professional investors as well as advisory firms and their clients. EGA manages investment funds, provides investment advisory services and develops investment strategies for banks, asset managers and family offices. All in one service offered via entities in the UK, Ireland and Europe. Since 2021 new partners have added multiple new investment strategies. The Firm now manages seven UCITS Funds.
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