AXP
This assignment is part of the unique Academic Excellence Program (AXP). This program is a cooperation between MN and PGGM, two leading Dutch pension fund service providers. Students will get the opportunity to work alongside investment professionals, collaborate with other students and learn about institutional investing. On regular AXP-days all students in the program will come together in The Hague or Zeist to share ideas, learn from each other, attend presentations from investment teams and discuss job opportunities.

Research topic

Institutional investors are increasingly adopting customized stock indices that incorporate Environmental, Social, and Governance (ESG) screenings. These indices are tailored to exclude companies that do not meet specific ESG criteria, such as those involved in controversies or those that lag on key ESG metrics. While this approach aligns investment portfolios with ethical standards and client preferences, it introduces a significant challenge: increased concentration risk. When a standard index like the MSCI World Index is modified through negative screening, the exclusion of certain stocks leads to a proportional redistribution of index weights among the remaining constituents. This often results in an overemphasis on the largest firms, exacerbating concentration risk. High concentration in an index can reduce diversification and amplify systematic risks, particularly if the largest firms are highly correlated or interconnected with other companies in the index. For example, the collapse of a major tech firm could have a cascading effect, impacting its entire sector and network of suppliers and business partners. While such systematic risks are well-researched in the banking sector, they are less understood in other industries. This poses a significant concern for large institutional investors, such as pension funds, which have substantial allocations to listed equities portfolios tracking custom ESG-screened indices. To address these risks, weight caps are often introduced to limit the index weights of individual constituents. However, while this approach reduces idiosyncratic risk of the company itself, it does not fully address the issue of network effects and systematic risk due to correlations. Furthermore, imposing weight caps can increase tracking error relative to the standard index, potentially leading to higher costs if large-cap stocks perform well due to fundamental economic factors. This project aims to develop a comprehensive framework for analyzing and mitigating systematic risks in custom ESG-screened indices. By examining the correlations and comovements of stocks within a given custom index universe, the project will identify common economic exposure factors and propose an optimal issuer cap level for the portfolio construction where both risk and tracking error are addressed.
Objectives:

• Provide a literature review on existing fundamental beliefs and existing empirical findings on limiting concentration and idiosyncratic risk with common consensus (if existing), or overview of different interpretations.
  • In the chapter, look at both absolute and relative idiosyncratic risk and identify the risks involved there. What happens if one of the top companies goes bankrupt? What would be the implications on the absolute risk-return in the near term as well as in the long run.
• Develop a Systematic Risk Measurement Framework: Create a robust framework for measuring systematic risks in non-bank stocks. This framework will consider network effects and sector interdependencies, providing a comprehensive view of potential risks in the custom index.
  • Review also absolute implications; not just for the sector itself, but on other sectors as well (increased market volatility, contagion effect, supply chain disruptions, banking sector strain. highlight two key findings: 1) will we still achieve the primary target of the overall return mandate which is “return on liabilities + 3%”, and 2) how would applying an issuer cap measure versus not applying a cap at all?
• Analyze Correlations and Co-Movements: Conduct an in-depth analysis of the correlations and co-movements of stocks within a custom ESG-screened index. This will help identify common economic exposure factors and understand the interdependencies between different sectors and companies.
• Propose Optimal Issuer Cap Levels: Based on the analysis, suggest ideal issuer cap levels to mitigate concentration risk while maintaining a balance with tracking error. This will involve evaluating the trade-offs between risk mitigation and portfolio performance, ensuring that the custom index remains aligned with the investor’s ESG objectives. Also indicate whether or not the introduction of a cap is beneficial based on risk and return metrics.

By achieving these objectives, the project will provide valuable insights into the systematic risks associated with custom ESG-screened indices and offer practical recommendations for institutional investors to manage these risks effectively.

Your profile

For these assignments we are looking for ambitious students with:

• Quantitative background (eg. Econometrics, Mathematics, Financial Engineering, etc.).
• Programming skills in Python.

Your work environment

The graduation student will be placed in the Equities Management & Research team of MN. The team is a.o. responsible for managing a significant portion of the European and North American listed equities portfolios for our Dutch pension fund clients. The team comprises five fund managers, responsible for the daily management of the portfolios. The project is a collaboration with MN’s Fiduciary Management team. Fiduciary Management is a.o. responsible for creating new strategies and evaluating current strategies.

MN as an employer

MN is serving 7 pension fund clients in the areas of Board Advisory, Asset Management, and Fiduciary Management. For our clients we manage pension assets worth approximately EUR 150 billion, that makes MN the third largest pension fund Asset Manager in the Netherlands. About 35.000 companies (employers) in various industries are affiliated with our clients, representing about 2 million pension fund participants in total. We invest globally in equities, government and corporate bonds, loans, real estate, and private equity, etc.

As a MN employee, you can expect

• A monthly internship allowance;
• Emphasis on work-life balance and flexibility in working hours;
• Numerous opportunities for learning and personal development and a calendar filled with social events;
• Hybrid working environment as the default, with a modern office building in the center of The Hague. It is easily accessible by public transport and has in-house facilities for exercise, relaxation or a refreshing coffee from our in-house Barista.
• The internship should be scheduled within the first half year of 2025. For this assignment the main location will be MN in The Hague.

Contact

We would like to meet you! Click on the apply button and upload your resume and motivation. If you have any questions, please contact Siona van Dijk via recruitment@mn.nl.
We look forward to receiving your application and welcoming you to MN!