For advisors who have clients with an expressed desire to have their investments mirror their personal values, whether those values are social, religious, or environmental, there are literally hundreds of choices, including mutual funds, ETFs, and separately managed accounts. The tricky part has always been aligning a carefully planned asset allocation strategy with those expressed values to create a comprehensive investment portfolio, but a new series of four multimanager asset allocation funds created by Pax World and Morningstar Associates may make that a little easier.
In a recent interview, Joe Keefe, Pax World's president and CEO, acknowledged that while there are networks of advisors such as First Affirmative, Progressive Asset Management, and Veris Wealth Partners, with business models founded on principles of socially responsible and sustainable investing, for the vast majority of advisors this is a relatively new subject. "We're seeing an increased demand for sustainable investments, green investments, socially responsible investments--call them what you will," he says. "Up until now those advisors have really had no systematic way to go about constructing portfolios. If they want to create an asset allocation plan for a particular client, or incorporate sustainable and SRI options into the asset allocation plan they already have for that client, they have to do all the work themselves. It's a laborious process," he points out. "What we were trying to do here is create a one-stop, turnkey solution so there's a series of asset allocation funds that hopefully would be appropriate for any client that came to one of those advisors."
"With these portfolios the advisor can put the client into the portfolio that most closely matches the asset allocation that's already been designed for the client and at the same time the client gets access to this great variety of ESG (environmental, social, and governance) approaches and managers," adds Jon Hale, senior consultant at Morningstar Associates and the head of the team that will act as subadvisor to the funds.
The four new funds--ESG Managers Aggressive Growth Portfolio (95% stocks/5% bonds); ESG Managers Growth Portfolio (70% stocks/30% bonds); ESG Managers Moderate Portfolio (50% stocks/50% bonds); and ESG Managers Conservative Portfolio (65% stocks/35% bonds)--each use up to 15 strategies, or "sleeves," and 11 different managers who integrate those ESG factors into their investment analysis and decision making. Pax World is the investment advisor to the portfolios while Morningstar is charged with manager selection, asset allocation, and portfolio construction and monitoring.
The subadvisors chosen to manage individual sleeves include some of the best-known names in sustainable investing and give advisors and their clients access to a wide range of investing styles. The managers and their respective sleeves include:
o Access Capital --Investment Grade Fixed Income Strategy
o Ariel Investments--Small/Mid Cap Value Strategy
o ClearBridge Advisors--Large Cap Value Strategy
o Community Capital Management--Investment Grade Fixed Income Strategy
o Miller/Howard Investments--Equity Income Strategy
o MMA Capital Management--Investment Grade Fixed Income Strategy
o Neuberger Berman Management--Large Cap Blend Strategy
o Parnassus Investments--(two sleeve strategies) Equity Income Strategy and Small Cap Strategy
o Portfolio 21 Investments--World Stock Strategy
SMAs Into Mutual Funds
When I suggested that the arrangement sounded like a group of separately managed accounts bundled into mutual funds, Keefe agreed but noted that "The only exception to that is three of Pax World's sleeves are actually investments in our existing funds. We manage five sleeves out of the 15 right now and three of those are actually investments in underlying Pax mutual funds."
The sleeves that Pax will be managing are: Multi-Cap Equity Strategy; Global Green (Environmental Technologies) Strategy; International Equity Strategy; High Yield Bond Strategy; and Real Return Strategy. The underlying investments for these sleeves will include appropriate Pax World mutual funds such as the Global Green Fund and the High Yield Bond Fund. For its international sleeve the firm plans to invest in either the Pax World International Fund or a soon-to-be launched ETF--the ESG Shares FTSE KLD Europe Asia Pacific Sustainability Index Fund. Morningstar's Hale pointed out that the use of an ETF such as this is just another way to expand the scope of the investment offerings.
These portfolios are only available to the public through advisors and have a minimum investment of only $250 for Class A and C shares ($5 million for institutional shares). Expense charges are comparable to other asset allocation funds.
A Long-Range Perspective
One of the seminal moments in the SRI movement was the launch in 1971, by a pair of Methodist ministers, of the Pax World Balanced Fund (PAXWX), so the firm has obviously been paying attention to ESG issues for some time. Keefe says there are many reasons why investors are now also beginning to take ESG factors seriously. "There are a lot of things you could point to" he says, "from the recent financial crisis and the focus on the short term to the detriment of long-term financial goals to the growing interest in climate change. You could focus on how consumers and investors in this information age are becoming a lot more conscious in their buying decisions, whether it's purchasing food or purchasing investments--aligning their investments and their consumption with their values." But for Keefe, "the big picture is simply that we're seeing a global shift from an industrial-age economy fueled by coal and oil to a sustainable economy fueled by clean energy and energy efficiencies and innovation. Companies are finding that building sustainable business practices is becoming more and more profitable. There's a fundamental bottom-line argument for sustainability."
What Keefe says Pax World and Morningstar Associates are trying to do with these portfolios is "harvest" the investment returns that are available as a result of this transition. "We think that you're seeing among individual investors and institutional investors a dramatically increased interest in sustainable investing precisely for that reason," he says. "People are doing it because it makes investment sense. They think this is the direction the world is heading."
Managing Editor Robert F. Keane can be reached at firstname.lastname@example.org.