ValueWalk’s Raul Panganiban interviews George Mussalli, Chief Investment Officer and Head of Equity Research at PanAgora Asset Management. In this part, George discusses what led him to investing and PanAgora’s approach to ESG investing.
The following is a computer generated transcript and may contain some errors.
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PanAgora's Approach To ESG investing
So to start, can you tell our listeners a little bit about your background and how it led you to panagora?
Yeah, so I have been probably a typical quant analyst, Portfolio Manager background.
So growing up I was very interested in in stocks, I started buying individual stocks in high school. enamoured by the excited by looking at the ticker tape and learning about different companies. I devoured everything I could about the stock market and how it works. I didn't have much experience in my family, my parents weren't in investing. But I learned on my own, I would go to the drop off at the library and I pour over value line research books and things like that.
And at the time I was at so you know, interest kind of star Portfolio Manager fidelity. I read all his books. And that's kind of I decided early on that that's what I the goal, I wanted to be a stock picker, Portfolio Manager.
And then as I did my studies, I was always leaning towards math. I loved it and did well at it. So you know, starting undergrad at Tufts, I added a double major and on top of quantitative economics, I did mathematics. And then worked a couple of years at john Hancock investments as an analyst and I went back to MIT for my Masters, where I did quantitative finance. And then I had to make the decision.
What job I wanted, I had the decision between a fidelity fundamental analyst and at the time I joined Putnam Investments as a corn analyst, and really decided that, you know, quantum was just a very early in its stage there. It wasn't really even a industry like the way it is today. just starting out. But I knew I fit more into the quantum world and the fundamental world and I thought I could make a bigger difference there than the army of fundamental analysts that
were going to I was going to compete against fidelity. So I chose that route. And actually, the experience I had Putnam shaped, you know, what I've been working on for last 20 years at panagora. You know, because of the background.
I was working with the client team at Putnam but simultaneously trying to blend fundamental on corn in adnams massive mutual fund. At the time, it was second largest mutual fund family in the country and they're trying to find ways
To incorporate quants signals with their fundamental analysis, and we tried a lot of different ways I was exposed to different types of methods of combining the two.
But I also had to speak the language of the fundamental analyst to get our point across, right. So when we got to panagora, I started leading one of the investment teams there.
And those are the types of ideas we can infuse into the process, I think, I can see both sides of the coin and I know the strengths and weaknesses of fundamental incline.
So we put together a process product called stocks back there that tries to quantify fundamental insights. And that's what we've been working on for the last 20 years and built a business.
And that's where the the origins of some of these the CSG work we've done, started.
That's very interesting. So the today's the topic of today's discussion is called ESG. For those of our listeners who are unfamiliar with ESG, can you provide a quick rundown of what it is as well as panagora? his approach to it?
Yeah, I think it's a long evolving history. I think the origins was a very simple thing. So I think, five years ago, or so, requests started coming from clients wanted specific constraints on their portfolios, whether it be our carbon exposure to specific industries, and with you know, with in the current world, you know, perfect construction is pretty easy to tweak. So the, what we call ESG 1.0, was, you get the requests from the client, and you restrict the portfolio from any subset of stocks that they want. And then some clients did this on their own, you know, creating products that was a global equity product x, certain stocks, then came the third party ranking services such as MSCI is the leading one.
And you know, there, if you think of it anally just, well, I think I make them hear them to Moody's s&p bond rating, right, they'll give assign a score based on very standard metrics, like number of independent board members or diversity in the workforce, or cut tonnes of carbon emission, and LSI B scores a company, so then that was a very easy tool that courts would use to restrict their portfolio on.
So we've taken it a step further at panagora, where we think to be a successful company, you need to uphold all of these metrics, that the beliefs that you run a company that's, you know, kind to their workers and to the community that you're in, they have strong governance, that you're worried and consider about the pollution you're emitting. And these are just basic fundamental traits that good company should have a these days.
So we find we see that's the first pillar of our ESG strategy is yesterday's alpha. It's not a constraint that's going to burden the portfolio but a way to add value.
The second thing is materiality, right? So not all factors are more important for all companies.
We have a voluntary technique to do that. And then what's very important in this world of ESG is customization.
We have clients all over the world, if we manage $40 billion for its to fill clients. A half is in the US, half is split between Asia, Middle East and Europe. And we see the differences and the different requirements that pension funds and sovereign wealth funds have around the world. And it varies region by region, plan by plan. We want to be as adept as possible to meet the client's needs.
So in that case, we created our own framework where we can customise a portfolio based on on the traits and the values of the asset owner.
Thank you for sharing that. So one of the reasons ESG has taken off in recent years is because it can provide investors unique insight into the risks of companies, in your opinion, what risk and return drivers do ESG factors illuminate that aren't captured by traditional financial metrics.
So actually, you know, if you look at the evolution of our interest in ESG, it wasn't, which some other asset managers feel the need to provide a ESG product because of the demand in the marketplace. Because their marketing department chooses and this is a place they need to be in
panagora happened very much the opposite way. So so 10 plus years ago, you know, we we observed that the, the makeup of companies around the world are changing, right. So previously, you know, it's a very, it's a very story, a very tangible assets, right? If you look at the leading companies in the 80s, they, the rankings were concluded companies like
Exxon Mobil, General Electric, United Technologies, very heavy industrial, product driven companies, where if you just look at the balance sheet of the company, those are the assets, right, you add up assets, you plant property equipment, if you want to look at the quality of the earnings, you can look at things like depreciation, and RV, everything you needed, was on the balance sheet, and actually worked well for decades. However, given the change in technology, Internet, and the transformation of companies starting in the 90s, early in the 2000s, we saw that this wasn't enough to capture the whole story. So we started going off balance sheet into what we call intangibles. Right? And now if you look at today's list of leading companies, Apple, Microsoft, Google, Amazon,
if you look at their balance sheets, they're very small. Right? So versus their market cap. So where's that extra value? It's an intangible, right? You can't recreate Amazon's time membership, right, in the in the infrastructure they have. Right. You know, you can't you can't replicate Google's, you know, ubiquity across the internet, right?
So you how do you capture those things? How do you how do you measure those things? Right. So that's where we started going down the path. It led us to a lot of factors. But among those factors that were starting to become in vogue in ESG, right, so we started looking at governance over 12 years ago, which was the kind of first pillar of our ESG platform. And then five, six years ago, I started looking at the environment of governance, aspects as well.
And we think like I said, these are drivers of performance, you can't have a good, well run company that's going to succeed without at the base, having good governance, treating their company, employees and customers Well, in the community, they have an environmental that's how our process evolved over time.
I have good points to make. So you touched a bit on this earlier, but how do you determine when it comes to materiality? How do you determine which of these ESG factors are material for your clients? And how do you build that into their models?
This is a very important part of our process.
You know, so So,companies, you know, we don't look at companies as just tickers or q tips, you know, like other courts do, or they're really really living breathing companies, we know the products we get to know the companies, we talk to management's you know, we host management's at the when we used to be physically in our Boston offices, they would come by not not for any you know, understand what what's how earnings are
Working this this month or this quarter, but to understand the business models and how companies make money and things like that, we see the ESG is a very different over the whole landscape of companies. Take Take two companies in the same industry, right. So one approach to materiality is dissect by industry, right. And there's there's some standards in within ESG, that third parties that do that. So for chemical companies, they'll prefer environmental factors. And for you know, financials, they'll do governance, right. And on the surface, that that seems fine.
But I, you know, if you're looking at nuanced, there's a much better way to do it. And I'll give you an example, though, in media media, typically, you're going to focus on more SMG, right? Because a typical media company doesn't really have a big footprint,
with physical plant, right, and doesn't pollute much. So, you know, if you're just doing a top down by industry, you're going to miss some of these nuances. So take Netflix, and Disney, right. So Netflix, huge company, a couple of 1000 employees, I
know some some work in office buildings or work from home.
But they don't have much environmental footprint. So we agree that that shouldn't be the case. However, Disney is also a media company. And they have parks all around the world. They have cruise ships, is a very physical
Fence Company. Right?
So we should look at environmental for Disney, right, even though they're in the same industry.
Whereas for Netflix, we believe, you know, we are in our model would would
that social is that most important thing for Netflix, right? So a lot of different owners that one is, we think of employee retention, in the focus that the company has on their employee base is very critical.
Across the board, but especially in certain industries like Netflix, right? It's all intellectual property, right? So it's either the people who are finding and creating the content, right? The new films and TV shows, and it's the programmers that are creating the front end experience that attracts subscribers that don't really if the, you know, if the if the company, if Netflix doesn't treat their employees, well, they're gonna lose all this talent, and they weren't, the company's going to be nowhere.
Whereas Disney, it needs to be a mix of environment as well as social.