It’s payback time for investors who have been seeing a return to favour of the equity value investment style after years of underperformance versus growth stocks. A sustainable investing approach in value equities can enable investors to benefit from attractive valuations of responsibly managed companies that can deliver steady long-term returns.
At BNP Paribas Asset Management, we offer investors the combination of both the value style and a sustainability-based investment philosophy in the US equities universe in the form of a strategy designed to generate higher risk-adjusted returns than the MSCI USA Value index.
Value investing is not dead
In the recently published paper, Value Investing: Capitulation or Opportunity, we explained why we believe that the underperformance of value versus growth stocks may well end sooner rather than later.
The current, relatively high level of the value spread (the difference between valuations of value stocks and those of their peers) in conjunction with the risk of rising inflation in the US leads us to view the market environment as offering the best opportunity for US value stocks this decade.
In Value investing:Is this the biggest opportunity since the tech bubble?, we argued that value spreads were at their widest across all regions since the tech bubble in the late 1990s. Such a large gap in valuations explains why we see the odds of value spread compression as high in most regions of the main global equity markets.
Exhibit 1: Value spreads for the MSCI World, USA and Europe indices are currently at multi-year highs – the graph shows the value spread for the respective indices for the period between July 1996 and April 2021
Source: MSCI, BNP Paribas Asset Management, as of April 2021
Combining value, sustainability and diversification
The quantitative equity portfolio management team at BNP Paribas Asset Management has managed a sustainable US value multi-factor equity strategy since 2017. Our strategy targets cheaper (value factor), less risky (low risk factor) and outperforming (momentum factor) stocks that have the highest profitability (quality factor).
This approach can offer investors diversification both via the range of factors taken into account and the integration of ESG considerations into the investment process.
Indeed, the strategy takes both sustainability and carbon reduction considerations into account. These tilt the portfolio towards stocks in companies that have strong environmental, social and governance (ESG) qualities and a low-carbon footprint. As a result, it has received both the French SRI (Socially Responsible Investment) label and the Belgian ‘Towards Sustainability’ label.
In financial terms, we believe the results are impressive. Since inception, the strategy has outperformed the MSCI USA Value index by more than 4% (see exhibit 2) and delivered an information ratio of 1.0 as of August 2021.
Over a period when value stocks significantly underperformed growth stocks, especially in the US equity market, our strategy has tended to offer a significantly superior long-term performance thanks to its diversified factor approach.
Table 1: Risk/Return profile of the Sustainable US Value Multi Factor Equity strategy since inception (September 2017)
|In US dollar terms||Annualised, since September 2017|
|Sustainable US Value Multi Factor Equity strategy gross of fees||14.0%|
|MSCI USA Value index (NR)||9.9%|
|Excess return strategy over MSCI USA Value index|
gross of fees
|Annualised ex-post tracking-error||4.1%|
|Information ratio (gross of fees)||1.0|
Source: BNP Paribas Asset Management, as of August 2021. Past performance (gross of fees) is not indicative of future performance. Denominated in US dollars. Calendar performance (classic share class) -6.66% in 2018; 21.97% in 2019; 0.45% in 2020.
In addition to its strong risk/return profile over the long term, the strategy has a significantly stronger ESG profile than its reference index, as well as a carbon footprint that is at least 50% below that of the benchmark, making it a reliable sustainable US value strategy for investors.
Table 2: Key features
|August 2021||Sustainable US value Multi Factor Equity||MSCI USA Value index|
|ESG score ||60.9||53.4|
|Improvement ESG score||+14%|
|Carbon footprint ||34.2||88.0|
|Carbon footprint reduction||-61%|
Source: BNP Paribas Asset Management, August 2021
At BNP Paribas Asset Management, we integrate sustainability criteria when investing in US value equities as we aim to deliver higher risk-adjusted returns than those of the US Value index over the long term.
With inflation risk rising in the US and the value spread close to its highest in the last two decades, we believe value investing will be a successful strategy in the near future.
For this reason, it is our view that investors interested in value investing with an integrated sustainability and carbon reduction approach should consider the Sustainable US Value Multi Factor Equity strategy.
 BNPP AM’s internal ESG scoring methodology determines an issuer’s ESG score by evaluating performance vs. scoring peers on a narrow set of key ESG issues related to the environment (e.g. climate change), social issues (e.g. human resources management) and governance (e.g. independence and competence of directors). BNPP AM uses numerous research inputs and data sources (e.g. Sustainalytics, ISS & Trucost) to determine issuers’ ESG scores. If the issuer’s commitments and practices on a pillar of assessment (E, S or G) are better than scoring peers are, it will receive a positive ‘contribution’ for this pillar. Each issuer is assigned a final score from 1 to 99 that is the result of 50 as a reference plus the sum of the contributions from each of the three pillars. For more information on ESG indicators, please refer to BNPP AM’s webpage
 The portfolio carbon footprint is the sum of companies’ carbon emissions divided by companies’ Enterprise Value multiplied by the weight of companies in the portfolio. Carbon emissions are the sum of Scope 1 emissions (direct emission from the company’s facilities) & Scope 2 emissions (indirect emissions linked to the company’s energy consumption). Carbon data provider is Trucost. The footprint is expressed in tons of CO2 equivalent per year and per million euros invested. Enterprise Value (EV) is the measure of a company’s total value. It is calculated by summing the market capitalisation and the financial debt of a company.