Client’s Challenge
A fund issuer managing a Hong Kong large cap, high dividend equity fund is seeking to attract more assets by expanding its investor base to include those with an ESG mandate. This fund already has a stellar performance, outperforming its benchmark – the Hang Seng Index – by more than 40% over a three year period (25% portfolio return vs -15% benchmark return).
Objective
Construct a portfolio strategy that effectively combines an ESG dataset with the fund’s existing dividend and quality factors, to enhance overall returns. In addition, the fund issuer aims to keep all portfolio constituents the same, as well as achieve a set of portfolio constraints, including minimum dividend yield requirement, limited deviations from original constituent weights, individual constituent weight capping, and volatility minimization.
Solution
We developed a composite ranking score for each existing portfolio constituent that combines its dividend yield rank and ESG Risk rank. For ESG Risk ranking, we used YoujiVest’s China ESG Risk Scores (CERS), which offers the most comprehensive ESG Risk rating coverage on Hong Kong public companies, including H-Shares and all Hong Kong Connect stocks. Once the composite ranking scores were calculated, the portfolio weight of the each constituent was determined by taking the inverse of the individual stock’s composite ranking score divided by the sum total of all stocks’ inverse composite ranking scores. These portfolio weights were further optimized to ensure they met established constraint criteria.
Over a three-year period, from June 2020 to June 2023, the ESG-enhanced portfolio returned 81% vs. 25% for non ESG-enhanced portfolio and -15% for the Hang Seng Index.
