“With the Patience Premium, it’s not just “doing right” or “feeling good.” All of these indicators are tested in detail based upon what they contribute to investment performance, and it turns out that the focus on sustainability is an important part of that. “

Matarin Capital Management recently announced the launch of two long-term investment indexes: The Matarin Global Long-Term Index, and the Matarin International ex-North America Long-Term Index. The Long-Term Indices are designed to allow investors to capture a “Patience Premium” for long-term investing in the stock markets, which integrates a focus on ESG (environmental, social, and governance) factors.  We explore the approach at Matarin below, with Co-Founder Nili Gilbert.  Tim Nixon, Managing Editor, Thomson Reuters Sustainability.


Tim: Please tell us a bit about Matarin.

Nili: Matarin is a women-owned asset management firm, managing about $1.4 billion in the stock markets on behalf of institutional clients.  We co-founded the firm in 2010 based upon our shared desire to live and work with high integrity, to be true stewards of our clients’ capital, and to contribute useful thought leadership in the capital markets.

Tim: Are you doing any ESG integration at Matarin?

Nili: At Matarin, we are financial-first investors, which means that we focus on sustainable investment in areas where we believe that it can improve our performance.  For us, this means integrating ESG in forecasting stock returns, in mitigating risk, in proxy voting, and importantly in terms of Matarin’s own social impact as a firm.  We also implement negative screens based upon client preference.

We are now launching a new Global Long-Term Investment Index that will be calculated by S&P, that is focused on holding stocks that are expected to offer investors a “Patience Premium” for being long-term investors.  ESG is important among the considerations that we take into account when calculating Patience Premium scores.

Tim: Why are you launching a new index into a crowded field?

Nili: The amount of assets invested in traditional passive market-cap weighted index funds has exploded in recent years.  We believe that this trend, in excess, is negative for the capital markets, and relatedly for all of the outcomes that the capital markets affect around the world.  When money is invested in a stock “passively” without regard to any of a company’s fundamental financial or nonfinancial attributes, it can lead to mispricing.  In cap-weighted indexes, companies are just being rewarded for their size, not for anything that they are doing in their businesses or in the world.  This has the negative effect of causing the stock markets to become more inefficient, and less likely to reward the kinds of attributes that investors should truly care about, or to deliver the most attractive long-term returns.

At Matarin, we came to believe that we could build a better index.

Tim: What is novel about it?

Nili: A number of indexes have been put into the market in recent years that evaluate stocks based upon new kinds of indicators – looking beyond just market cap. Several of these have been focused on ESG.  With the Patience Premium, we worked intensively to identify stock selection factors that we believed would improve returns, including all of the features that we have designed in ESG space, though our partnership with Sustainalytics.  With the Patience Premium, it’s not just “doing right” or “feeling good.” All of these indicators are tested in detail based upon what they contribute to investment performance, and it turns out that the focus on sustainability is an important part of that.

Tim: Who are your partners?

Nili: S&P is our most important partner.  In the design of the custom indices methodologies, Matarin’s investment team engaged directly with S&P Dow Jones Indices’ (“SPDJI”) research and development team. This is the first time that SPDJI’s R&D team has ever collaborated with an outside firm on the research and development of a custom index methodology, so the partnership is somewhat historic and we are honored to be a part of it.  SPDJI’s custom indexing team will also be administering and calculating the indices on an ongoing basis.  Both sides have brought very unique contributions to this process, and we believe that this diversity of thought has yielded great results.

When it comes to ESG research, Matarin partnered with Sustainalytics for the creation of some proprietary factors. Not only on data for the “Progress Towards Sustainability” indicators that are part of the Patience Premium score, but also on the identification and exclusion of the “Worst In Class” ESG controversy stocks.

Tim: How will you measure the financial success of your index?

Nili: The Global Long-Term Index is designed with the expectation of outperforming the common large cap developed markets indexes such as the S&P Broad Markets Developed Markets Large Cap Index or MSCI World, with low tracking error. Performance should be evaluated over the course of a business cycle.

Tim: How will you measure the sustainable-impact success of your index?

Nili: The question of how to have sustainable impact from investments in the stock markets is both complicated and important.  Simply refusing to buy the stock of a company whose practices we would like to change may not be the way to have a maximum impact on a company, depending on the company’s financial situation. In many cases it may be more effective to own the stock and engage, if proxy voting among like-minded investors has the potential for influence.

We are also thinking about what it would take to help support a market-wide paradigm shift towards more sustainable practices.  We believe that there are opportunities to change the conventional wisdom about what a successful investment would look like – so that it becomes common practice to look at longer-term factors, including sustainability. We hope that the Patience Premium can be a part of that paradigm shift.

Tim: Do you have specific SDG-aligned goals which are more important than others?

Nili:

Goal 5

At Matarin, as a women-owned firm, we hope that our daily work is contributing to Goal #5, “Achieve gender equality and empower all women and girls.”  Michelle Obama inspires us when she says that it’s hard for young women and people of color to dream of a professional future that they can’t see evidence of out in the real world.  So, we feel it’s important for prominent firms run by diverse teams to be rising in our industry, and we work hard in the hopes that Matarin will be one of them.  We also believe that having more diversity in control of capital throughout the markets will allow the markets to more efficiently reflect all of our shared societal values, perspectives, and objectives.

Goal 8

As we contribute our best thinking on ideas such as cognitive diversity and the Patience Premium, which we believe would be beneficial for the markets and all of the systems which the markets touch, we hope that this will add to Sustainable Development Goal #8, “Promote sustained, inclusive and sustainable economic growth,” as well.

Goal 17

Finally, the Patience Premium initiative is born of an objective to identify the ideas that can bring more private sector actors to the table in achieving the Global Goals. And we’ve benefitted from putting our heads together not only with other businesses, but also with intergovernmental organizations, academics, and think tanks in honing the Patience Premium idea.  In this sense, we are inspired greatly by Goal #17, “Strengthening global partnerships for sustainable development.”

Tim: How does the “patience premium” align with the increasing urgency in addressing challenges like climate change?

Nili: Climate change is both an urgent and a long-term problem, just like many of the other environmental and social hurdles that we face.  At Matarin, we see issues not only in terms of scarcity of time to respond to these hurdles, but also in terms of scarcity of socio-political will, and importantly scarcity of the capital that will be required to make a difference.

We believe that increasing the focus on our long-term goals, will motivate key actors to respond in the near term.  If we focus seriously on what our long-term objectives are, it should become obvious that there are some actions that need to be taken today in order to live into that future.

By way of example, one of the 4 factors that make up the Patience Premium score rewards companies for making “Progress Towards Sustainability.”  This focuses on companies that are taking present action to improve over the long-term.

Tim: What could be next if this index is a success?

Nili: At Matarin our immediate goal, of course, is ensuring the success of the index as it launches and making sure to really ‘stick the landing’ with it.

We’d be thrilled if the existence of the Global Long-Term Index and the Patience Premium initiative were to not only inspire investors to think differently about how they are managing their portfolios, but also inspire corporate boards and management teams to think and act with more of a long-term focus.