Two themes set to dominate fund investing in 2022

While the ESG trend offers new opportunities for innovation, defensive strategies have come to the surface this year

Ask any fund investor what is on their mind in the second half of 2021, and two themes are likely to rank high on the list. First, the industry continues to break new ground in sustainability, expanding into tactical strategies like factor investing and Echange Traded Funds (ETF); second, a clear trend for defensive play has come into focus in response to the continued spectre of Covid-19.

Naturally, banks are positioning funds that help investors manage both trends, with some innovative and exciting propositions emerging.

ESG Investing: an ever-expanding frontier

As humanity accelerates its response to the Climate Crisis, an awareness of ESG issues has crept into every aspect of our lives. This year in particular will see the world take stock of its progress at the COP26 conference in Glasgow, sharpening the focus on our environmental and social impact across the world. No surprise then to find investment managers pushing this frontier in the way they allocate funds, and while this trend is not new, there is still room to innovate and push boundaries.

According to Stanislas Mesland, Head of Equities Strategies at BNP Paribas’ Quantitative Investment Strategies (“QIS”) team, factor investing is the latest investment option to back this trend. “ESG integration in factor investing intends to improve the ESG features of the portfolio while keeping the factor exposure at a very high level,” he explains, “It enhances our offer by considering not only companies’ financial related metrics but also non-financial ones, to enhance the stock selection. Our research shows that by combining factors and ESG, investors can improve long-term performance, reduce risk and increase diversification.”

ESG integration in factor investing intends to improve the ESG features of the portfolio while keeping the factor exposure at a very high level. It enhances our offer by considering not only companies’ financial related metrics but also non-financial ones, to enhance the stock selection. Our research shows that by combining factors and ESG, investors can improve long-term performance, reduce risk and increase diversification.

Stanislas Mesland, Head of Equities Strategies at BNP Paribas’ Quantitative Investment Strategies

BNP Paribas’ THEAM Quant fund is at the forefront of ESG investing, innovating to ensure clients have new ways to align their investment and sustainability goals.
Here are two examples of how THEAM Quant stays ahead of the curve:

Factor Investing with an ESG Flavour

For BNP Paribas, 2021 was marked by the launch of the Growth Europe ESG Index and very recently of its related Easy ETF (Bloomberg: EGRO FP), which represent a unique combination of growth descriptors to identify the most promising companies for investors. What’s truly pioneering is the additional integration of ESG criteria in the stock selection, seamlessly tying together pursuit of growth with ESG impact. The underlying has currently delivered exactly what it has been designed for: outperformance of its benchmark, both from a financial and extra financial point of view.

The bank is accelerating ESG integration into its factor offer, including in the ETF range, allowing clients to maintain factor selection as the main objective, while delivering on sustainability goals.

THEAM Quant Fund – World Climate Navigator 90% Protected

This fund, which comes with a 90% daily max. Net Asset Value (NAV) capital protection feature, aims to increase the value of its assets over the medium term by being exposed to a dynamic basket of global equities systematically selected on the basis of both ESG and financial robustness criteria as well as the companies’ carbon emissions and their forward-looking energy transition strategy.

Protection is achieved via an innovative option based approach that aims at reducing the risk of cash lock compared to more traditional protection algorithms.

No offence taken…

While ESG is a perpetually growing trend, markets have moved rapidly in response to recent events, seeing defensive strategies lift off. Recovery from the health crisis looks uneven across nations, and many economies still face an uncertain path ahead. Meanwhile inflation and tighter monetary policy have come into play after a long spell on the sidelines.

Gilles Edouard Espinosa, Head of Option-based Strategies at BNP Paribas’ QIS team, notes that, “While risk aversion is a clear response to the outlook in markets right now, well-built strategies can still find opportunities for positive income. We combine over 30 years of experience in equity derivatives with a finely tuned expertise in QIS, especially in options and risk mitigation strategies, which has seen great success in our longer-running strategies and allowed them to hold up performance even through the testing times of the last few years.”

While risk aversion is a clear response to the outlook in markets right now, well-built strategies can still find opportunities for positive income. We combine over 30 years of experience in equity derivatives with a finely tuned expertise in QIS, especially in options and risk mitigation strategies, which has seen great success in our longer-running strategies and allowed them to hold up performance even through the testing times of the last few years.

Gilles Edouard Espinosa, Head of Option-based Strategies at BNP Paribas’ Quantitative Investment Strategies

In a changing world, investors need access to a range of strategies to cover shifting market conditions. This year BNP Paribas’ THEAM range launches an innovative defensive approach to volatility, leveraging on the 4 years track record of one of its volatility income strategies:

THEAM QUANT – Dynamic Volatility Carry

This fund seeks to provide the benefits of long volatility exposure during pronounced market stress scenarios, while exhibiting positive carry on average. The strategy delivers an optimised way of getting long exposure to VIX® futures, which reflect the market’s expectations of US equity volatility. It aims to secure on-average positive carry thanks to the daily sale of short-term out-of-the-money put options on S&P 500®. This income-generating component leverages on a similar concept implemented in the US Premium Income fund.

THEAM QUANT – Equity US Premium Income celebrates its 4th anniversary

The fund, launched in 2017, seeks to deliver a target premium income by implementing a fully transparent and systematic put-writing strategy on a selection of US stocks. After 4 years of operation, the fund has shown its ability to generate a recurrent alternative income in a low yield environment. In 2020, despite the February – March equity market gap, the strategy has helped clients navigate the Covid-19 health crisis successfully and managed to rebound quickly. It was helped by its flexible sector-allocation feature, moving from its 2020 techs and healthcare overweight into industrials, financials and more cyclical areas in Q2 2021.

One thing is certain; in a changing world, innovation and a relentless focus on the dominant trends will allow investors to find opportunities no matter how markets evolve.

Related solutions

Equity Derivatives

BNP Paribas has around 30 years of consistent experience in the equity derivatives market, and we are well-known for our capabilities in providing a comprehensive product range of diverse solutions across both flow and structured products. We are focused on designing new strategies and innovative solutions to meet all our clients’ demands.