Active vs Passive vs Smart Beta ?
What a tricky question. Quantilia asked Alexandre Duriez, Co-Head of Investment Management and Research at Ossiam – a specialist asset management company headquartered in Paris, to share his views on the question as well the other interesting thoughts on machine learning applied to ESG.
The advantages of Smart Beta ETFs over traditional ETFs
Quantilia [Guillaume Subias]: Ossiam’s notoriety comes from its expertise in quantitative strategies and smart beta solutions. Can you tell us about the investment process used and what makes it unique?
Ossiam [Alexandre Duriez]: Our investment process is fully systematic and driven by our quantitative and fundamental research. Before we offer a strategy to our investors, we make sure that the investment philosophy that underpins the strategy has clear economic foundations and is backed by academic research. Most of our models are developed and managed in house by a team with complementary backgrounds ranging from mathematics to econometrics and computer science to economics and finance. We position ourselves among academics or specialist firms that bring the latest innovation to our clients.
Quantilia: As a strong ETF player, what trend do you see in the ETF industry for Europe based investors? What are the advantages of Smart Beta ETFs over traditional ETFs?
Ossiam: Over the past decades, the ETF industry has been growing globally and particularly in Europe. While not as mature as the US market, the competition in Europe is increasing and we can see topics such as ESG, fixed income, artificial intelligence or other disruptive themes emerging among most providers. We position ourselves as a pioneer in “smart beta” solutions in the sense that we go beyond the themes by offering clients alternative weighting methodology to traditional cap weighted indices that might suffer from high concentration in a particular company, sector or region.
For instance, we build “defensive” portfolios for clients concerned by possible economic slowdown or market turmoil. Smart beta strategies improve the portfolio risk-return profile and reduce the inefficiencies of traditional market cap weighted indices.
Quantilia: Under which circumstances could smart beta ETFs drive traditional ETFs and actively managed funds out of the market?
Ossiam: We are convinced that the three approaches will continue to exist side by side in investors’ portfolios. Traditional passive ETFs will continue to serve as a cost-effective benchmark investing solution for asset allocators. Many discretionary managed funds have struggled to deliver consistent outperformance and justify their higher fees. However, human input, and the associated costs, remain a necessity in the asset management “value chain”, like suitable risk allocation or to execute less liquid or “niche” trading strategies.
One can see Smart Beta products as “commoditized” versions of proven trading strategies which were previously executed by discretionary managers. They are a valuable alternative to passive ETFs and actively managed funds in a portfolio, generating alpha over traditional benchmark in a transparent and cost-efficient way.
Quantilia: I recently saw you have a long history of winning awards for innovation. What is your secret? What is the latest innovation you have brought to the market?
Ossiam: Since the creation of the company, innovation is at the heart of our business model. To remain relevant to investors, we must provide true valuable alternative to low cost beta products. Therefore, we focus all our efforts on innovation and alpha generation, which has been indeed recognized by the industry with multiple awards. One of our global developed equity ESG ETF, launched at the end of last year, uses machine learning to select stocks based on their ESG profiles and received the L’AGEFI award for Best European ETF Innovation 2019 in Equities. We did win the same award in 2018 for our Investment Grade Eur Credit strategy.
Our latest strategy listed in June 2019, provides exposure to US equities assessed on the basis of their ESG characteristics, their capacity to reduce the carbon footprint and their exposure to equity factors (Momentum, Size, Value and Volatility). This strategy innovates by recognizing the existence of factors at both stock and sector level that complement each other under different market conditions.
Combination of machine learning and AI leads to positive influence on Smart beta strategies
Quantilia: Can you please tell us a bit more on your machine learning and ESG strategy? How does it work?
Ossiam: The possibility to link ESG metrics and financial performance has been a challenge for years. Traditional linear ESG filtering uses ESG scores calculated by ESG rating agencies as a weighted average of multiple ESG indicators. We rapidly realized that those are very unlikely to carry enough information to identify investment opportunities and the need to screen the data at a granular level to identify patterns within a company’s ESG profile and its financial performance.
Machine learning is a powerful tool when it comes to processing large amounts of rich, diverse and informative data in a continuously evolving environment. The amount of financial and non-financial data is continuously growing at a fast pace and increasing its coverage regarding the company’s universe. The ability to use machine learning for discovering useful patterns and to apply the findings by artificial intelligence methods further improve the risk-return profiles of smart beta strategies, if used properly. The combination of both has allowed us to win the L’Agefi awards as mentioned previously.
Quantilia: Ossiam is a part of Natixis IM group. What are the advantages of being backed by a large group? What kind of support do they provide you with?
Ossiam: Although we operate as a fully independent asset management boutique alongside more than 20 other affiliates of the group, being part of Natixis IM places ourselves under its supervision framework and gives us access to its global distribution team. We benefit on one hand, from the expertise and resources of a large group to maintain the highest standards of risk management and controls and, on the other hand, from a distribution capacity able to cover client specific needs worldwide. This mutualization of resources is cost efficient for the group and ensures we can offer the most relevant investment solutions to clients in the most efficient way.
Co-founded in 2009 by four partners including Bruno Poulin, CEO and Tristan Perret, Co-Head of Investment Management and Research, Ossiam was created with the aim of providing clients with the opportunity to capture investment factors or market inefficiencies using rule-based investment strategies. Ossiam is a research-driven asset manager, pioneer in smart beta solutions. The team has an extensive experience in quantitative research and product design, fund management, trading and risk management. Ossiam funds use alternatively weighting methodology called smart beta applied to multiple asset classes. The funds are listed on several stock exchanges in Europe and through transparent and liquid vehicles, including exchange-traded funds (ETFs). Headquartered in Paris, Ossiam is an affiliate of Natixis Investment Managers. Ossiam is also a signatory of the UN Principles for Responsible Investment.
About Alexandre Duriez
Alexandre is co-CIO and runs the Portfolio Management and Quantitative Research activities, alongside Tristan Perret. He joined Ossiam in May 2018 from Barclays Investment bank, where he was a Managing Director responsible for Global Investment Strategy Trading since 2009. He worked previously with Merrill Lynch International as Head of Fund Linked Derivatives Trading for 5 years and Societe Generale Asset Management for 3 years. Alexandre graduated from Institut Supérieur de l’Aéronautique et de l’Espace-Supaero in 2001 and holds a Master’s degree in Finance from the Toulouse School of Economics.