Impact Investing – Constructing A Portfolio

A rapidly increasing number of investors have expressed interest in – and committed dollars to – the realm of sustainable investing. This trend has not been lost on fund managers, who have significantly boosted the number of investment offerings in this field. From the perspective of investors, this change has led to meaningful improvements in terms of the quality of what’s available in the marketplace. But it also means there is a very large number of funds to evaluate and choose from.

In order to construct our Impact portfolio, BDF took a deep dive into this rapidly evolving part of the investing world. We spoke with the fund companies that oversee some of the largest funds in the industry. We dug deep with portfolio management teams to get a better understanding of how they think about the investing world and how they navigate the challenges specific to socially responsible investing. Here are the things BDF considered as we were building our Impact portfolio.

What Did We Include?

• Our Core Investment Philosophy: The funds included in BDF’s Impact portfolio stay true to BDF’s core investment philosophy and the way we think about the investing world. The same tilts that are prominent in all of our portfolios, specifically the way we lean into value, small-cap companies, profitability, and momentum, are all present in Impact. From this perspective, you can think of Impact as having a dual mandate: we adhere to our core investment views while also promoting socially responsible objectives.

• Impact Investing: Oftentimes, funds use exclusions as a way to tilt their portfolio towards socially responsible or environmentally aware objectives. The funds in the Impact portfolio also utilize exclusions as a way of establishing a baseline of what they’re not willing to hold. But most of the funds also assign a score to each of the companies in the universe they cover based on their handling of environmental, social, and governance factors. The managers then build a portfolio by holding more of the companies with favorable scores and less of the ones that score poorly. This “Leaders” approach means that a fund may still hold things you’d expect a socially responsible fund to avoid, such as a big energy company. But they’ll be limited to the ones with best practices in terms of limiting their environmental impact. The result is a more diversified portfolio than a fund that relies just on exclusions. And that can mean smoother returns and lower volatility for investors.

What Does BDF Avoid?

• Over-Active Management: Research shows it is very difficult for stock pickers to consistently make the right calls and outperform their benchmark after their often-sizable fee is deducted, which is why we didn’t include these types of funds in Impact.

• Niche Funds: Do you have an electric car and believe it’s only a matter of time before everyone drives one? Is gender diversity amongst a company’s senior leadership a cause you’re passionate about? There are funds that will invest only in these very specific niches. While these funds can be a great way to put dollars behind your interests or concerns, they can have high volatility and an erratic path of returns.

By staying true to our investment philosophy and BDF’s core principles, our Impact portfolio should deliver the investment experience our clients have come to expect while also helping them align their investments with their values. Our next Wealth Watch on sustainable investing will look at one of our most frequently asked questions: How might this way of investing affect the performance of my portfolio? Reach out to your Wealth Management team with any questions.