Focused on Outperformance, Lower Risk and Aligning with Investors' Values

 

Key Benefits— Hennessy Stance ESG ETF

»     Values Alignment: We select companies we believe 
have values aligned with our investors.
»     Outperformance: We seek to outperform the overall market.
»     Lower Risk: Risk Management is a distinct component 
of the portfolio construction process.

Would you please discuss how the portfolio is constructed?

Beginning with the S&P 500 Index, we remove companies that have exposure to weapons, tobacco, and fossil fuels, which totals approximately 30 companies. 

Then we overlay our proprietary ESG (Environmental, Social, and Governance) analysis, which entails ranking, scoring, and weighting the remaining companies against their industry group peers. In our analysis, we consider multiple ESG factors such as waste profile, water and energy utilization, carbon emissions, labor statistics, compensation, and diversity of board and senior management. Based on the results, the bottom 50% of companies are discarded while the top 50% or approximately 200 stocks, are further analyzed.

At the same time, we perform another analysis based on 20 years of historical financial and market data. This process attempts to predict the top 100 companies that may outperform on a risk-adjusted and total return standpoint. This fundamental model does not look at particular segments of the market; it is only considering the statistically likelihood of outperformance.

The intersection of these two analyses produces our list of ETF holdings that undergo portfolio optimization to minimize tail risk and maximize diversification. 

We repeat this process on a quarterly basis, adding or deleting companies or reweighting stocks based on their relative rank.

Would you please discuss a few new holdings?

First Solar, a manufacturer of solar panels, was purchased in the second quarter of 2023. From an ESG standpoint, the company receives high scores for sustainable revenue, sustainable investment, and carbon productivity. We also like First Solar from a fundamental standpoint.

In April, we purchased Amphenol, a major producer of electronic and fiber optic connectors. From an ESG standpoint the company also gets solid marks for sustainable revenues and investments. In addition, fundamentally they exhibit strong momentum. 

Among the E, the S, and the G in ESG, what factor currently appears to be the most important to investors? What is most important when building out the model?

In a general sense, most ESG investors are concerned about climate risk. We believe this concern becomes heightened as more investors personally experience the effects of climate change, including more destructive storms and floods, wildfire spreads and associated smoke, record-breaking heat waves, rising ocean surface temperatures, etc. 

That said, there are spikes in interest around S and G. We have 25 material risk factors that cover E, S, and G, but in carbon-intensive industries, the highest weightings are for carbon intensity and “green” product and services revenues, both of which are environmental factors.

What are the current sources of demand for ESG products?

Demand is coming from everywhere and in pockets that increase in size each year. Institutional investors, such as pension funds and endowments, have long been significant drivers of ESG demand. These large investors often have long investment horizons and have increasingly been integrating ESG factors into their investment decision-making process. Institutional investors are particularly concerned about long-term sustainability and risk management, which aligns with the goals of ESG investing.

As it pertains to retail investors, ESG investors skew younger, higher educated, and female. Millennial investors present the best opportunity for growth of ESG adoption. By gender, females express the strongest interest in the topic. Female decision-makers are an influential and growing segment across generational groups, and their interest in ESG-related topics provides a clear opportunity for engagement.  

We believe Financial Advisors recognize the changing preferences of their clients and the growing importance of ESG investing. Many Advisors have started offering ESG-focused portfolios and investment options to meet investor demand.