Changebridge: ETF provider seeks ‘misunderstood’ company

Jan 25, 2021
ETF provider on uncovering ESG blind spots, letting active managers do the leg work and hopes that the corporate access tech revolution will last

Ross Klein is founder and chief investment officer of Changebridge Capital, which offers the Changebridge Capital Long/Short Equity ETF (CBLS) and the Changebridge Capital Sustainable Equity ETF (CBSE). He talks to IR Magazine about the long-short mix, fertility as an ESG metric and finding misunderstood companies.

Can you talk about your investment process?

Changebridge’s ‘quantamental’ (quantitative plus fundamental) approach begins with proprietary screening tools and a factor-based coding system.

The quantitative system identifies inefficiencies – opportunities for fundamental analysis to take over and add meaningful value. The quantitative elements of the strategy are intended to reduce the impact of behavioral biases on our CBLS and CBSE portfolios. The combination of quantitative analysis to reveal areas of interest with fundamental analysis to determine intrinsic value is central to CBLS’ investment process.

What’s your investment horizon?

For CBLS and CBSE, our long positions tend to have at least a one-year time horizon. For our short positions in CBLS, we tend to have a six-month holding period.

What’s the average position and the largest position?

The average position in both funds is about 2.8 percent, and our largest position is about 4.5 percent. Changebridge designed these portfolios to be disciplined around our highest-conviction holdings, with a target of 30-40 longs in each portfolio.

You say that you seek value in the ‘tails’: places where your model indicates one thing but the stock’s performance says another. Can you tell us more about that?

Our in-house quantitative system seeks to identify company-specific inefficiencies: companies that are misunderstood. They tend to have multiple business segments, participate in an emerging technology, or be recent listings or spin-offs.

Rather than using our model to identify relative value, we intentionally look for the extreme ends of the spectrum to find companies that appear to be detached from the rest of the market. From there, Changebridge has an opportunity to start the fundamental part of its process with an eye toward companies that are statistically likely to be misunderstood.

How do you view and assess ESG opportunities at smaller companies?

ESG data is not available for many small and mid-sized companies. Much of the available data is derived from companies that have the scale, resources and incentives to provide ESG metrics. This mere act of providing ESG data can be an expensive and time-consuming endeavor for many companies. Compounding this reporting bias, the data-aggregators have prioritized their data-collection efforts toward the same large companies.

This may result in a coverage blind spot for ESG investors. The mere presence of formattable data becomes a relative advantage (almost regardless of what the data reveals) leaving many investment opportunities out of the discussion altogether. This is akin to exclusively searching for a lost set of car keys under the streetlight ‘because the light is much better here’.

Can you tell us about some of the positions where you see value in the company’s ESG?

BrightView Holdings is a position across CBLS and CBSE. The company offers water-management and landscaping services across the US.

BrightView has not provided enough ESG-related metrics to be effectively captured by some of the large ESG databases, which creates an opportunity for Changebridge to uncover hidden value. By engaging with management about its sustainability initiatives, it became evident to the team that ESG is a priority with tangible evidence. The company’s Growth in Relationships + Opportunities for Women (Grow) initiative reflects its commitment to achieving greater diversity of gender. Management also conveyed an ongoing commitment to reducing water waste through better irrigation strategies. Changebridge views these commitments as representative of ESG leadership.

Progyny is another holding across CBLS and CBSE. The company operates as a fertility benefits manager, offering patients education and guidance across a network of fertility specialists. A growing number of couples are experiencing infertility, with around one in six seeking treatment.

Despite the growing need, most corporate policies focus on providing benefits for those who have had success in family-planning journeys with parental leave and work-life balance. At the same time, fertility challenges can be personal, costly and isolating. Organizations that embrace a fertility benefit program are often rewarded with more appreciative and loyal employees, more productive employees and, most importantly, better outcomes for those able to tap into a network of specialists.

Why should IROs be thinking about Changebridge? Is there anything companies could be doing to bring themselves to your attention?

Changebridge believes the burden of identifying whether a company warrants the ‘ESG’ tag belongs to the active manager. Because of inconsistent data coverage and measurement among the index providers, there is no fair, balanced and broad spectrum by which to measure the entire universe of public securities. Further, small companies face a dilemma: spend upwards of $1 mn on disclosures or allocate that capital to the benefit of all stakeholders? We contend that active ESG managers should be tasked with making that decision.

Reach out directly. Screen for active managers with an ESG mandate. Ideally, look for asset managers that have been focused on ESG for years, or that launched their firm with an ESG mandate from day one. 

Has the pandemic had any impact on the way you engage with companies?

It has made life much easier. Companies don’t need to travel to meet face to face. The process has become much more efficient, and access to management teams has improved.  We’re hopeful that this technological improvement is lasting.

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