With Great ResponsibilityArabesque wants to take socially responsible investing to the mainstream. It’s an altruistic notion, but, as CATHY ADAMS finds out, CEO Omar Selim is also focussed on performance and profit

When you own something, it’s also a responsibility, something that you should use in order to influence a company in the best way possible. It’s a gentle activism

OMAR SELIM KNOWS a good soundbite when he hears one. Over the course of our two-hour meeting, he utters the phrase “we want to be the Pret A Manger of asset management” several times, but it’s no less effective for it. As an analogy for his new sustainable investment platform Arabesque, it’s a good one.

Quantitative asset manager Arabesque, which came into being following a management buyout from Barclays in June 2013, has one aim – to take sustainable investing mainstream.

ESG investing, which takes into account environmental, social and corporate governance factors, has been a hot topic over the past few years. It’s picking up momentum already: Selim notes that, according to a report commissioned by Arabesque and the University of Oxford last year, more than 70% of S&P500 companies are now reporting on sustainability.

Selim’s background isn’t particularly rooted in ESG investing, though.“I’ve been in banking for 20 years,” he says. “I started at UBS, then went to Morgan Stanley and Credit Suisse, and for the past nine years I was with Barclays.” It was at Barclays that he ran the institutional global markets sector for Europe, the Middle East and Africa. Three years ago, he was asked by a client to spearhead a “revolutionary asset management concept” – which was, essentially, the skeleton of Arabesque.

Selim and his team researched funds from all over the world – and even built calculators to thoroughly analyse the numbers. “We learned something that was never big on my radar screen, which is socially responsible investing,” he says. “Traditionally, when we invest our money we don’t really think about what it does, as we just want the return. That’s all you care about. But what we think will evolve is thinking about how sustainable the return is, and how the money came about.”

They bought out the business from Barclays 18 months ago. “Barclays allowed

us to take it all away, because many investors said they didn’t want the fund to be influenced by the investment bank. You can imagine how easy that was to explain to Barclays,” he laughs.

This is where Selim’s analogy comes in. If the traditional asset management industry is the Burger Kings and the KFCs, then Arabesque is at the opposite end of the spectrum as Pret A Manger: “Healthy living has changed and so many people eat sushi and salad and soups now,” Selim comments. It’s not a superficial moniker, though. His point is to differentiate what Arabesque is doing: creating an investment opportunity based on the values of several key values, including the United Nations Principles for Responsible Investments and the United Nations Global Compact.

Socially responsible investment is typically a case of industry exclusion – removing alcohol, tobacco, gambling and weapons production stocks from the investment universe. Arabesque takes a ‘best in class’ approach, which essentially means not necessarily stripping ‘bad’ companies off the roster straight away. Take a mining company, for example. Within the sector there are companies that adhere to stricter standards on issues such as wastewater management and energy consumption. These are the ‘best in class’ companies.

To get to these top stocks, Arabesque implements a systematic screening process – based on over 200 ESG indicators – to identify a portfolio of 1,250 stocks filtered

from an initial universe of over 77,000. “I just take the very best out and with those I can operate,” Selim says. This is what the team calls the Arabesque Prime League.

“If you want a good meal then it needs two things. It needs good ingredients and a good cook. These are my ingredients – I clean them and I get them ready.”

So far, so altruistic. But no matter how socially responsible its investment mandate might be, it’s also about profit, and the next step is to screen for performance.

Selim agrees. “The second step is about picking the right companies.” Arabesque uses the most sophisticated methods available to create an investment proposition that can compete with any fund around the globe.

Arabesque offers three funds: the Prime Fund tracks the performance of the Prime League; the Fundamental Fund selects a tighter pool of 400 stocks from the Prime League; while Arabesque Systematic incorporates the ESG and fundamental modules of the other funds, but adds market timing to the process.

After the stock selection process, Selim is keen to point out that the work doesn’t start and end with simply owning the shares of good companies: “It’s called engagement,” he says. When you own something, we believe it’s also a responsibility, something you should use in order to influence a company in the best way possible. It’s a gentle activism.”

To be able to implement so many different filters, Arabesque employs some pretty serious technology and works with several impressive partners to help it find its select fund universe. In the early days of the idea, Barclays teamed up with Maastricht University and Stanford University – as well as Oxford and Cambridge universities – to develop the technical quantitative screens. It also has a heavyweight team behind it, many with backgrounds in ESG and quantitative research.

The technology is such that Arabesque can drill down to rich detail and create ▶

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▶ bespoke exclusions for clients. For example, LVMH is classed as a luxury good, but in fact 16% of income comes from the Moët Hennessy division, Selim says, which might not be suitable for clients who want to steer away from alcohol investment. “We have to take not only the industry classification, but see where the money actually comes from,” Selim explains.

You’d be forgiven for thinking that the worthier the investment process, the lower the return – whereas in truth, that’s not the case. Since inception, Arabesque has outperformed the benchmark MSCI All Countries Index by 5.51%.

“Ultimately, our objective is not just to have another impact-investing fund,” says Selim. “We want to take socially responsible sustainable investing into the mainstream because we believe this will happen.” Relying on the Pret analogy once again, Selim says his aim is to make “healthy investing” the norm, and offer investors something “everybody is comfortable with”.

“When you think about your finances, maybe you don’t get excited about it. But you don’t realise what an important issue it is in society,” Selim says. He argues that companies that run themselves responsibly and transparently, with better strategies, will naturally outperform.

Much like Arabesque itself, it seems. The asset manager is run as a transparent organisation, and everybody who works for the company holds a stake in the firm. There is the mentality that ‘the market hurts us just as it hurts you’.

“Maybe ten years ago we’d never have thought that you couldn’t smoke in a public place, and now it’s absolutely accepted,” says Selim. “I don’t do this in order to fulfil any beliefs or moral standards that I have. I do this because it’s good for my portfolio.” HFor more information, see arabesque.com

The asset manager is run as a transparent organisation, and everybody who works for it holds a stake. There is the mentality of ‘the market hurts us just as it hurts you’

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