HEAD-TO-HEAD: Abrdn versus Alquity

Both international equity strategies integrate ESG methodologies into their investment processes, but do so in different ways, according to Liu.

The Aberdeen Global Sustainable and Responsible Investment Equity Fund, which only converted to an ESG approach on 1 October 2021, has a “qualitative approach, which combines inhouse derived ESG scores with identifying ‘leaders and laggards’ among sectors ad individual companies based on conventional metrics,” said Liu.

The best companies from a potential return perspective are filtered according to the durability and quality of their business models, key financial ratios, and management ability to produce a quality rating.

Next, the fund managers source ESG ratings on them from a variety of providers, which are typically diverse. They note the correlation and dispersion of those ratings to determine an aggregate score, which incorporate as many as 100 key performance indicators.

“However, the managers are not tied to the results, and make subjective adjustments to the scores,” said Liu.

“The strategy is purely bottom-up, and delivers a concentrated portfolio of between 35 and 40 individual holdings,” she said.

In contrast, the managers of the Alquity Global Impact Fund have a quantitative approach.

The MSCI World index is filtered for the stocks with the highest MSCI and Sustainalytics ESG scores to produce a universe of around 700 stocks, which is then reduced to “beta portfolio” of 100 to 125 stocks that tracks the MSCI World index, said Liu.

Next, two sources of alpha are tapped: one based on the macro environment and the other on conventional equity metrics.

“For the first process, 20 countries are assessed, and the best four are overweighted and the worst four are underweighted in the portfolio,” said Liu.

“The second process leads to the identification of the top 35 stocks based on price-earnings ratios and other measures, and if they are not already part of the beta portfolio, then they are added to the fund,” she said.

The ESG element is represented by a commitment of 15% of the portfolio to companies that generate at least 50% of their revenues from activities that tangibly meat one or more of the United Nations Sustainable Development Goals.

Nevertheless, “the managers aim to limit the tracking error versus the MSCI World index to 4% and 6%, which potentially limits upside performance,” said Liu.

“The strategy is based on how the managers constructs the quantitative models, and there is much human impact on stock selection,” she added.

Fund characteristics