Aficionados might point to the Warren Buffetts of the world to support their claims that, over the long term, few investing methodologies can eclipse the performance returns generated by seasoned practitioners of value investing. But what if a new emergent form of value investing is set to supersede conventional value investing in the decades to come?
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Old school investors may scoff at the idea of socially responsible value investing generating superior returns. After all, value investors with a tilt towards sustainability and ESG factors have fewer companies from which to choose. At an investment committee meeting, corporate governance controversies would render some companies ineligible for consideration. Negative externalities originating from sugar consumption over the long term might eliminate soda companies, such as the classic Buffett value play, Coca Cola. Fossil fuel suppliers would not even make it past a first round of debate. And violations of International Labor Organization standards would put a knife in the hearts of some companies with international bases.
Careful scrutiny of the remaining companies would eliminate a host of others based on valuation, intrinsic value trends, competitive dynamics and other screening criteria. Yet in spite of the obvious challenges, this comparatively nascent form of investing is showing signs of gathering pace and standing toe-to-toe with traditional value investing when it comes to performance returns.
Perhaps the most prominent fund to overlay sustainability criteria with value investing is Generation Investment Management. Despite co-founder Al Gore enjoying global notoriety, the co-managers of Generation’s flagship Global Equity fund, Mark Ferguson and Miguel Nogales, have historically been shy of publicity. Whatever the PR strategy, the investing strategy has translated into enormous success. Since inception in 2004, Generation has grown to manage over $15 billion in AUM as of March 31, 2017. And data from Mercer ranked Generation #2 among over 200 global equity managers with 10 year returns averaging 12.1% annually.
We can peer into the future value investing landscape by examining the performance returns at Generation and understanding the demand for socially responsible investments (SRI) from investors. Generation has delivered long term returns to support its thesis that value investing with a sustainability overlay can match traditional value investing performance returns. And the recent launch by leading robo-advisor, Betterment, of SRI portfolios may be a sign of increasing investor demand for investments that have a social-good overlay.
Betterment claimed that its decision to launch socially responsible investing portfolios was a direct response to client demand. Due to the constraints of liquidity and high expense ratios, Betterment is only able to support client SRI elections in the large cap arena. And as investors vote with their dollars to select SRI portfolios versus core portfolios, the supply of managed funds to meet investors’ needs is likely to rise in coming decades.
Interestingly, Betterment reported a 0.9979 correlation between SRI portfolio total returns and core portfolio total returns, however dividend payments tended to be lower and expense ratios slightly higher for SRI portfolios.
As a leading robo-advisor with approximately $9 billion in assets under management, Betterment has a good pulse on clients’ desires to align their dollars with their values. The launch of SRI portfolios is a shot across the bow to their competitors and the message should also ring in the ears of investment managers: liquid, low-cost socially responsible funds are increasingly demanded by investors.
Backing up that assertion is a survey from Forbes which claimed that millennials make more social impact investments than any other segment. As millennials gather wealth, they will likely place greater demands on fund managers to combine capitalism with social good.
Beyond fund managers, financial companies more generally are starting to pivot from the pure capitalist philosophy of focusing on maximizing shareholder profits to include social impact considerations too. For example, who would have bet on a financial lender incorporating the funding of financial literacy programs in under-served neighborhoods across the U.S. as part of its core business model? Yet CommonBond, a student lender pioneered a one-for-one social model where every degree fully funded on the CommonBond platform financed the education of a student in need.
The future of value investing may not be crystal clear but early signs point to the end of the black and white choice between making money and doing social good, and instead combining the two without sacrificing returns, and perhaps even enhancing them.
Article by George Windsor
Bio: George Windsor is an author at Investormint, a finance publication designed to help investors make smarter financial decisions and live a richer life.