Thursday, February 11, 2010

Low-Impact Investing

Imagine you are paid to tell wealthy investors where to put their money.  Three years ago you believed in modern portfolio theory and the so-called efficient frontier.  But around the end of 2008 all asset classes started moving in unison – southward - and then governments started throwing around hundreds of billions of dollars to, well, er….  Anyway, markets recovered through the end of 2009, but now they look random and you have no idea what to tell your clients to expect for annual portfolio returns.  You have a problem.

Imagine you’re a wealthy client.  You’ve lost faith in your advisor, but you don’t know where else to go for good advice, since most of the honest ones are sitting in a corner, rocking back and forth like apes taken too soon from their mothers.  Maybe you’re even a little guilty about making a pile during the funny money years and then watching millions of your countrymen lose their homes.  Again, you have a problem.

Now imagine a miracle product that would satisfy both the investment advisor and his client.  It would let the advisor tell the client he was winning every quarter.  It would make the rich client feel like investment is still a noble enterprise, and it would make him feel smart for being able to post quarterly wins again.  How would you design such a product?

Well, the old definition of winning would have to be replaced, or at least supplemented, by a new standard, and the new standard would have to be vague enough to allow any reasonably smooth talker the chance to claim victory even when financial returns are sub-par.  Enter Impact Investing.

Impact Investing is a poorly-defined investment style (not really an asset class) that asserts a non-financial bottom line, specifically a social or environmental benefit that the investor should value as highly as they once did financial returns.  In practice, it is a filter: Impact investors will look for investment opportunities that have some plausible non-financial benefit, and will exclude those for which such benefits cannot be claimed.  (Of course, it will take most companies around 6 minutes to start publicizing phantom social responsibility achievements, so what will really matter is not objective social or environmental results, but how confidently and empathetically your advisor can relay company press releases.)

For the investment advisor, Impact Investing is a license to practice incompetence while distracting clients with dubious claims to success- “Sure, your portfolio performance hasn’t matched the old, unenlightened benchmarks, but you may have saved an Indri lemur or two.”  Impact Investing will generate new revenues and pacify rattled clients, so investment advisors are about as happy to offer it as obstetricians were to offer Thalidomide back in 1957.

For the client, Impact Investing means a clean conscience and the sort of predictable, every-child-gets-a-gold-star victories that let him hold his head up in polite and ignorant company.  Less thoughtful clients may even believe that Impact investments will deliver best available returns while still saving the world – they will watch their portfolios languish until they figure out that a few hot funds don’t outweigh an unlikely investment thesis.

Recommendations:

  • If you are a fund manager, start an Impact Investing fund immediately.  Investment advisors will flock to it, and you’ll breathe easier knowing that you’re playing tennis with the nets down.
  • If you’re an investment advisor, and can stomach treating your clients with such cynical bad faith, allocate 10-20% of your clients’ assets to this new style.  And call it an asset class.  Simpler that way.
  • If you’re a client, run like hell from anyone who claims to advise on Impact Investing, since they are charlatans who are admitting that they can’t stand on their measurable investment returns.

1 comment:

  1. From a smart relative: "Ultimately we see that investors will predictably pay third-party managers to validate the idea that they are indeed top quartile investors and therefore, it follows, top quartile people. Garrison Keillor has made a good living making fun of our need to believe we are each above average. Impact investing is yet another way investors and asset managers convince each other of their mutual brilliance, with the added kickers of 1) a totally arbitrary scoring method, and 2) some moral self satisfaction on the side."

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