What to learn from Quant and ESG?  Assets in smart beta have grown at a ~30% annualized rate since 2009, quant jobs outnumber fundamental jobs 5-to-1, and >60% of investors blend quant and fundamental techniques. Quant models have grown increasingly complex, with investors using 17 factors in their models today vs. 7-8 in the 90s.

ESG saw the third-biggest increase in usage of any factor – 26% of clients use it today vs. 19% last year. Social/moral considerations were still the primary driver for use, followed by risk-mitigation.

Investors with both short- and long-term time horizons are using ESG, vs. a skew toward longer-term investors a year ago.

This from the BAML US Equity & US Quant Strategy.  See previous blog on their ESG work. Also of note:

Momentum is crowding out Growth & Value

Value and Growth factors were tied as most popular (both used by 38% of clients), but both saw a decrease in usage vs. last year, while Momentum strategies saw the biggest increase in usage.

Value still dominates the models for the 12th year running, thought it saw a drop in popularity vs. a year ago (used by 70% vs. 80% of clients). Relative Strength, a Momentum factor, saw the biggest uptick in usage vs. last year.

Still only a minority of quant funds are using ESG as a signal, even though they are using around almost 20 signals on average.

This gives me some comfort as a bottom-up fundamental active manager. However, the data is looking increasingly powerful on the quant side as well. There have been positive findings across other ESG data sets (with Sustainalytics and MSCI being the two other most used data sets; this one is the Thomson Reuters data set), although the correlation between these data sets remains relatively poor at between 0.3 to 0.5 in the studies and work I have seen.

The other factor this work and similar raises is the power of passively managed funds. They now make up over 40% of US-dom equity funds up from 20% in 2009, and I do not see this trend changing any time soon. In fact various forces may if anything accelerate this trend.

Vanguard now owns more than 5% of over 494/500 S&P 500 companies. Vanguard is now the steward of many people's capital.  That man in the street through Vanguard now owns 1/20th of the largest companies in the US.  It will be interesting to see how stewardship evolves in this situation.

More thoughts:    My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.

 One of the best Munger speeches on how to think about a mental model of inversion can be found here.

March 2018 thoughts on greed, fear and risk.  

 MSCI paper on high ROIC companies and ESG.