TOBAM's Choueifaty reworks the sustainability theme


TOBAM Asset Management is taking the idea of sustainable investment back to its roots in response, it says, to the way the the concept is being increasingly stretched.

Benchmark investing

Investors still cling to benchmark investing for two reasons, he suggests. First, benchmarks are a widely used way of measuring performance and risk. Second, investors believe benchmark indices are efficient, even though the academic work they were originally based on included some unrealistic assumptions.

“Unfortunately, many people have forgotten about the assumptions and (still) take for granted the fact that benchmarks are efficient,” he says.

He was attracted to the UN Principles for Responsible Investing because they do not try to describe what is good and what is bad. “It doesn’t take a moral stand. It says that “sustainable” is good and “not sustainable” is destructive. So, yes, it may ask: is it sustainable to pollute and exploit and let the next generation handle that?”

In addition, it doesn’t confuse ‘unsustainability’ and capitalism. “Capitalism is a sustainable system. In fact, it is the only one that is.” He argues that the financial crisis had its roots in sub-prime lending – that is, lending to those who were unlikely to be able to reimburse the loans. “That is clearly not sustainable. If there was a good intention, it was an artificial and wrong way to implement it.”

Another ‘unsustainable’ course, he notes, is the present lax monetary policy being followed by many central banks. “Printing money is simply not a remedy. Debtors and creditors need to take responsibility, and it is ­pointless to try to play the rich off against the poor. The solution needs to join both together.”

Sustainable investment means ensuring there is a solid foundation for continuing asset growth and returns. Following the UNPRI meant that TOBAM was not trying to reinvent concepts which were already increasingly adopted by investors.

Instead, the TOBAM portfolios can filter out stocks that are not compliant, and follow the “extremely transparent” process of institutions like Norges Bank, which engages the management of a firm it is considering dropping from its lists.

A sustainable investment structure for most institutional investors is a core-satellite model, where the core component is managed conservatively or cautiously while the “speculative” satellite element is the opportunity to implement views. Choueifaty considers the model will become more widely adopted, combining the long-term core sustainable strategy with an innovative element.

Speculation, he adds, originally meant “to be able to see”. “It has a role, and you can see various strategies come in and out of fashion. At the moment it is minimum variance or arbitrage opportunities, which are the opposite of diversification.”

After initially focusing on leading institutional clients, TOBAM’s clientele is expanding to include more intermediary/distribution channels. Will the firm have to diversify its own strategies if they become popular enough? Choueifaty says the firm’s distribution is as sustainable as its investment models.

“We have no capacity issues because everything we do is driven by client demand.”