Osmosis Investment Management has revised its equity factor definitions to better account for investment in innovation and the financial risks associated with resource use.
The $17bn (€15bn) asset manager argues that traditional measures no longer fully capture how companies create value, particularly as spending on research and development (R&D) has increased.
The changes underpin the iSTOXX Osmosis Multi Factor Transition Indices, a family of 48 indices launched with STOXX. The range offers single-factor, multi-factor and sustainability-integrated strategies for institutional investors.
“The foundations of factor investing were established decades ago,” said Fadi Zaher, chief investment officer at Osmosis. He said the next generation needed to reflect how companies create value today and recognise sustainability-related financial risks and opportunities.
Osmosis said the framework incorporates sustainability into the investment process from the outset.
Its Value factor, which identifies shares that look cheap relative to a company’s underlying worth, incorporates R&D spending and other investment in assets such as technology and knowledge.
Osmosis told IPE that much R&D spending is recorded as an immediate expense, leaving it outside companies’ reported asset values despite its potential to generate future income.
The firm adds accumulated R&D spending back into its investment calculations to better reflect a company’s underlying assets.
It said R&D spending had risen relative to production costs among large and medium-sized US companies since the mid-2000s. Accumulated spending had also grown relative to total assets.
Quality focuses on lasting profitability, manageable debt and reliable earnings. Momentum assesses share-price trends with risk controls, while low volatility emphasises the risk of losses.
Osmosis’s resource efficiency measure assesses carbon emissions, water use and waste per unit of revenue, comparing companies facing similar operational challenges.
The firm said resource use carried financial risks, including regulatory charges, higher financing costs and reputational damage.
Osmosis said each factor contributes equally to the risk of diverging from the benchmark, accounting for how the factors move together. Controls on trading, ease of buying and selling shares, and divergence from benchmarks aim to manage costs and risk.
The firm has engaged with public and corporate pension funds over the past 18 months, involving existing clients in testing resource efficiency alongside established measures.
It reported broad interest across several markets but was unable to disclose specific commitments or named pension fund investors.
