Advisors Learning The Ropes Of Impact Investing
Now that impacting investing has achieved buzz phrase status, the next step for financial advisors and their clients is to understand what the heck it’s all about and how it can fit into a portfolio.
These and other topics related to this emerging corner of the investing universe were part of the conversation Sunday among advisors, money managers and thought leaders during a full-day impact investing workshop that kicked off the third annual Innovative Alternative Strategies conference in Denver. The conference is hosted by Financial Advisor and Private Wealth magazines.
In a nutshell, impact investing is about doing good while generating some type of financial return. Impact investments can run the gamut from setting up health care clinics in Third World nations to finding ways to provide affordable housing to lower income people in the U.S. to providing clean water supplies in an increasingly water-starved world. Investment amounts can range from pocket change contributions from individuals via the crowd funding movement, to funds open only to accredited investors that invest in social or environmental projects or in companies plying the space.
Financial returns can vary from low single digits to as much as 20% or more, depending on the type of investment—debt, equity or cash—and how it’s structured. As for measuring the social impact returns on these investments, well, that’s still a work in progress.
But the point is, said several speakers, there’s a growing movement—particularly among younger people—to do good, have a positive impact on the planet, and to align their investments, or at least a portion of them, to those goals. It’s a slow-brewing, bottoms-up sea change in thought that could potentially re-orient not only the way individuals view their investments, but how companies conduct business as they start to account for the social and environmental impacts of their operations.
And for advisors, engaging in the impact investing space can add value to their practice by helping provide solutions for clients interested in this area. It also can be a differentiator when it comes to attracting new assets—particularly among the Gen X and Y crowds as they accumulate assets and seek financial planning help.
“Impact investing is a way to bring in the next generation [of clients],” said Ron Cordes, co-chairman of Genworth Financial Wealth Management and co-founder of ImpactAssets, which was created as a go-to resource for financial advisors interested in impact investments. He noted that one of big trends he’s seen among college-age people he’s worked with is an interest in social entrepreneurship and an interest in tackling global poverty.
Cordes said that advisors need to qualify their clients upfront because impact investing isn’t for everyone. “The conversation I have is ‘if I can show you a way to take 3% to 5% of your portfolio and invest that in a way that’s consistent with the things that are important to you, and we can earn competitive financial returns, is that something you’re interested in?’
“My experience is that people want to do impact investing, but they want to be convinced they’re real investments,” Cordes continued. “I think the industry is evolving to the point where there are more viable products with track records where you can say to a client ‘this investment has a high likelihood of giving you a reasonable financial return, in addition to a social return.’”
Cordes hosted a panel session with two fund managers—Gil Crawford, CEO and CIO at MicroVest, and Gerhard Pries, president of Sarona Asset Management Inc.—who manage products in the impact investing space. The flagship product at MicroVest, which specializes in microfinance opportunities in developing nations, is its Short Duration Fund, a vehicle aimed at the fixed-income part of a portfolio and that has a targeted return rate of a little more than 3%.
“People are attracted by the prospect of having a fixed-income piece in frontier economies, as well as by the demonstrated lack of correlation [with traditional asset classes] that microfinance has had over the past 10 years,” Crawford said.
MicroVest nets 125 basis points for every dollar invested in its Short Duration Fund. The investment minimum is $500,000.
Sarona, which among other things manages private-equity funds-of-funds in frontier and emerging markets with a focus on companies in the small to mid markets, charges a “1 and 10” fee structure. These funds are limited to accredited investors.
Pries said Sarona invests in two types of companies—those that produce products and services that are inherently impactful (i.e., are engaged in such areas as health care, microfinance banks, affordable housing), and those that don’t make things that are directly impactful but which are infused with progressive values at the core of their businesses. He noted that’s manifested in how they treat their employees, or their policies toward women and minorities.
“We haven’t yet figured out how to measure these things and report back to investors,” Pries said. But he added his experience shows that companies that infuse these values into their corporate DNA typically do much better when it comes time to execute their exit strategies.
“The world is moving toward stronger values expectations within the business community,” Pries said. “Companies at the forefront of that are getting premiums when they sell their businesses.”
And for Sarona, that means higher returns on their portfolio companies. Pries said Sarona aims to build portfolios that exceed 20% internal rate of return on a gross basis.
But as Cordis noted, both MicroVest and Sarona’s products are aimed at the high-net-worth investors. Going forward, the challenge for the impact investing industry is to develop products that are within reach of the mass affluent. In that vein, he said ImpactAssets plans to roll out impact-oriented debt products with $25,000 investing minimums, as well as products dealing with microfinance and other areas in the impact space.
Original post in Financial Advisor Magazine