Values In Your Public Equity Portfolio
If you have been a follower of Access Ventures for any amount of time, you have likely heard of our one-pocket investment approach. If you are new to the concept, a one-pocket mindset places your mission at the center of your investment strategy, thus aligning all of your assets to the values that drive your foundation. In contrast, traditional thinking believes in order to do the greatest good, you first need to make the most return—that good work and charitable contribution comes from the overflow of financial return.
In practice, the two investment mindsets are fairly similar. Both seek to optimize a portfolio of assets for the highest return possible given a certain level of risk appetite. You can think of portfolio construction like you would the building of a house. A house has certain basic goals that can be met through any number of combinations of design, materials, and construction. Many investment managers utilize the modern portfolio theory as a framework for constructing the right portfolio for a given set of circumstances.
A one-pocket mindset places your mission at the center of your investment strategy, thus aligning all of your assets to the values that drive your foundation.
The fundamental difference between investment mindsets is that a one-pocket portfolio will be tilted towards investment options that reflect its value set. The challenge here is to find an optimal mix of investments that reflect values without causing the portfolio to take undue risk. I have described this process in detail previously with the key takeaway being it’s difficult but not impossible. Over time Access Ventures has sought to find efficient solutions to this complexity within each asset class. In this post we’ll walk through our Public Equities solution.
How Values Drive Portfolio Construction
In addition to a conviction to invest our capital in line with our values, we also believe that companies scoring well on environmental, social, and governance metrics offer above-market returns in the long run. However, mindful of the risk in pursuing this strategy we turned to market experts to craft our public equity portfolio.
Access Ventures utilizes the Ethic platform to invest in domestic and developed non-US public equities. Working with their team we have created a public equity index that remains true to our organization values while also pursuing risk-adjusted, market-rate returns. In a nod to our one-pocket framework we also invested directly into Ethic to help them build out their platform and bring it to market.
If you are unfamiliar with index investing, it is a passive strategy that attempts to generate similar returns to the broader market. There are many variations of an index fund but the general idea is that a fund will purchase a certain percentage of all stocks within a particular market and use algorithms to buy and sell securities in a fashion that mimics overall market conditions. Many investors prefer this approach because it offers low fees and meets or exceeds the performance of an active strategy where someone is picking individual stocks with the intent of generating superior returns.
A distinct advantage of using Ethic, as opposed to buying an off-the-shelf index fund, is that you are able to define the range of acceptable returns compared to the underlying index (which is called a ‘tracking error’). With a typical index fund this tracking error range is determined by the fund manager and may or may not fit within your personal risk profile.
The Access Ventures public equity index portfolio is comprised of many organizational values. Below are descriptions of just a few of those values:
Labor Policies and Practices
Firms with poor labor policies and practices contribute to a wide range of negative societal impacts and are prone to labor disputes, litigation, and worker unrest.
Operators of private prisons, payday lending businesses, and gambling facilities have disproportionately negative effects on vulnerable communities.
Operational and Social Failures
Poor relations between a company and its employees, its community, or its supply chains are major sources of legal and reputational risk.
How Values Impact Investment Performance
The performance of our portfolio is measured against comparable, publicly-available index options. Our US equity index tracks the IVV iShares Core S&P 500 ETF and our developed non-US index tracks EAF iShares MSCI EAFE ETF.
The driving values of Access Ventures have led to the divestiture of 205 companies in the US and 620 outside the US, with operational and social failures being a chief reason. One may think removing options from a portfolio works against the benefits of diversification and leads to greater risk. In fact, the risk in each of our portfolios has been considerably less than their respective indices over the last four years.
One may think removing options from a portfolio works against the benefits of diversification and leads to greater risk. In fact, the risk in each of our portfolios has been considerably less than their respective indices over the last four years.
So how has our portfolio performed? Put simply: better than the market.
Over the last four years ended August 31, 2019 our US index outperformed by a modest 0.02% on an annualized basis while our developed, non-US index came in with an impressive 0.41% positive variance (net of fees). Of course we are unable to predict whether this performance will continue, we are satisfied with the results to date.
Why are we sharing this information? It is our hope that you are encouraged by this disclosure and would explore how your foundation may construct a portfolio in line with its values. If you are interested in taking the next step, we are happy to share our thoughts and introduce you to our friends at Ethic.