Omega Financial launches new stock index that factors ESG elements

Omega Financial Group did something not many private wealth management groups tend to do on June 12, announcing the launch of its own financial index — Argos AlphaEsg Index.

A Santa Barbara-based firm, Omega was founded in 2010 by Dylan Minor, who at the time was completing his Master’s at UC Berkeley.

Minor, in addition to having worked in the finance space for nearly three decades, is also a professor at UCLA. 

“This index truly is the culmination of my professional experience but also my academic experience,” Minor told the Business Times.

“Especially the last 10 years, on the academic side, I started having a clearer picture of how things are working and I thought this would be a great way to enhance the dynamics of client portfolios.”

This is the first index launched by Omega Financial, which has six full-time staffers, Minor said.

A stock index is meant to measure a subset of the stock market that helps investors compare current stock price levels with past price levels to calculate an overall market performance.

In the Argos’ index case, it takes 200 of the approximately 1,000 largest US public companies, chosen monthly based on combining financial and ESG factors. 

According to a firm press release, all 1,000 stocks are scored with equal weighting to financial and ESG prospects, and the top 200 scoring stocks are held for one month before the process is repeated. 

The financial factors are chosen to forecast future profitability, while the ESG factors are chosen to forecast future improved ESG performance. 

Esg, a shorthand for environmental social governance, is a broad term, Minor said.

For environmental, they are looking for how the performance on the dimension of environmental issues as it relates to a company’s financial performance.

“Increasingly there are new regulations and laws that directly affect your profitability based on your performance in terms of your environmental footprint,” Minor said.

“So for something like automobile companies, environmental is actually an important thing to look at that really matters. You don’t want to just look at the raw financial profit and loss, you can look at the environmental costs and you’re actually going to do a better analysis.”

In the case of a bank, then social performance is important — how well they treat customers and how much they are trusted — because that has a direct impact on profitability.

“This index is about weighting equally between pure financial prospects and ESG or sustainability prospects that you can link back to the materiality of the actual financial performance of the firm,” Minor said.

The ESG factors are obtained through artificial intelligence methods, specifically natural language processing — the same field that’s used for generative chat such as Chat GPT.

“This is using a similar technology to scour different reports, articles, to create a score about the future of a prospect’s sustainability and so that’s also different,” Minor said.

From this data, a company’s ESG performance prospects can be captured through Minor’s proprietary 3Ms TM process to forecast future ESG performance. The 3 M’s stand for ESG materiality, movement, and momentum, according to the press release. 

It is these factors together that help forecast future ESG and financial performance. 

The index has historical data back to 2007 and has been shown to deliver consistent and significant outperformance compared to other indices since inception, according to the press release.

Minor said the index has gained traction with institutional partners, as BNP Paribas, a France-based wealth institution, is launching an offering for its institutional clients to be able to access this index. 

Omega Financial is also offering this index to its own clients through a Beta warrant, which essentially helps limit investors’ risk on the portfolio.

It does this by taking only a portion of the investor’s total risk. For example, if someone wanted to invest $100, with a beta warrant the investor would only have to risk $2 of that total $100 but still see the gains as if they invested the whole $100.

And, should the index lose all of its value, the investor only loses $2.

The catch is that investors can only participate for two years, but could reinvest for another two years after.

“Historically, which is not a guarantee of the future, but at least historically, if you invested that way in this index, that would have added about a 2% more in net return to your whole portfolio which is pretty remarkable,” Minor said.

The stock index space is pretty crowded nowadays, Minor said, but he is confident the Argos index could make a name for itself.

“The is a plan for it is to become known, especially known among institutional corners,” he said.