Originally published: March 25, 2020
The Socially Inspired Investor Digest
Charles Hamowy, CFP®, CPA/PFS – CEO Saad Tahir – SVP & Partner – Investments & Operations Seasons of Advice Wealth Management, LLC.
QUESTIONWhat inspired you to start the Stewardship Personal Values Portfolios? Or rather, what event or series of events lead to the creation of these portfolios?
ANSWERCH: In February a couple of years ago, I think we will all remember a horrific shooting at the Marjory Stoneman school in Parkland Florida. Now certainly there had been other terrible mass shootings but for some reason it seemed we had reached a tipping point. Almost immediately I started to receive calls. All from clients with whom we have worked on behalf for decades. But now asking a question they’ve never asked before, am I investing in gun companies. The truth is pretty much all mainstream index funds do include gun companies. It dawned on me that for whatever reason the time had come that we need to be more accountable to not just returns, which are extremely critical but also the values that people have. And it’s not only guns. People have strong feelings about the environment and even the way companies treat their employees. We knew it would be hard but partnering with companies like Morningstar and others, we were able to build an investment strategy that not only focused on risk balanced returns, but also gave our clients a way to vote their investment dollars to reflect their personal values. This became the Stewardship way of investing. For the future we believe this kind of filtering will result in better performance in the long run.
QUESTIONDescribe your approach on how you filter investments for the Stewardship Personal Values Portfolios?
ANSWERST: At Seasons of Advice, we use a proprietary scoring algorithm to filter mutual funds and ETFs through the Morningstar DIRECT platform. Using their data and additional screening through Sustainalytics, we are able to filter this list of investments further by eliminating all investments that are rated average or lower on the Sustainability Rating spectrum. This filters the list of investments down from a few thousand options, to a few hundred. We then overlay this list of investments with an additional layer of filters revolving around specific areas of concern that include controversial weapons, palm oil, thermal coal, tobacco, small arms, and animal testing, which is optional. We look to eliminate investments that have more than 5% of their assets invested in companies involved in any of these areas of concern. Once filtered for the areas of concern, we look for the best option in each of the asset class categories that are represented in our firm-wide allocation models. We compare the investment in each category to its relevant benchmark to make sure the performance is in line or better and then add the investment to our “buy” list. This filtered list of mutual funds and ETFs is also complemented with some individual stocks that score high on ESG concerns to add a little extra alpha to the portfolio.
QUESTIONWhy is this approach different than buying a singular socially conscious fund like the Vanguard FTSE Social Index Fund?
ANSWERST: That’s a great question! What singular investments like the FTSE Social Index Fund are offering you is one investment that primarily invests in stocks and comes with the risk metrics of a stock investment. Our goal with the Stewardship Personal Values Portfolios is to provide a fully asset-allocated portfolio that not only manages risk by giving you access to stocks, bonds and alternatives but further breaks out those categories. I believe this focus on a fully asset-allocated portfolio and risk management by investing in multiple asset classes is the single biggest differentiator between a pre-packaged fund like the FTSE Social Index Fund and our Stewardship Personal Values Portfolios.
QUESTIONHave you been surprised by any of the findings once you started filtering for these specific “areas of concern”?
ANSWERST: There’s been a few surprises or “aha” moments as we have continued to work on the Stewardship Personal Values Portfolios over the past couple of years. The biggest one that comes to mind is the continuous addition of investments that now have an ESG mandate. This can be seen in recent announcements by people like Larry Fink, the CEO of BlackRock, who wants to turn BlackRock into an ESG focused asset manager. Another big surprise to me personally was how performance wasn’t affected by focusing more on investments that have an ESG focus versus investments that did not. In the past, one of the biggest reasons for not investing in these ESG investments was the belief that they tend to underperform their non-ESG focused counterparts. When we began to filter investments for our Stewardship Personal Values Portfolios, we came across countless options in multiple asset classes that were either outperforming or performing in line with their non-ESG counterparts and the subsequent indices. I think as this space continues to evolve over the next few years, we’ll find ourselves being surprised less and less since ESG focused investments and investing seems to be the way the industry is headed.
QUESTIONHow does weaving personal value choices or principles into an investment portfolio strategy help or hurt performance?
ANSWERST: Based on the results we’re seeing; performance is definitely not being hurt by investing ones personal value choices or principles as part of the investment strategy. We have a number of clients who have now been invested in the Stewardship Personal Values Portfolios since the onset in late 2018 and the performance since inception is on par, if not out-performing their blended benchmarks. As we mentioned before, we continue to back-test these portfolios using Morningstar DIRECT portfolio snapshots over the last 1, 3 and 5 years. The trend appears to be that these portfolios will perform just as well if not out-perform their blended category indices. Again, this is a back-test based on data already available and no guarantee for future results but the fact that more and more investments are now being offered with an ESG mandate will only help portfolios outpace their blended benchmarks.
QUESTIONThe risks to investors of most Climate Change scenarios seem overwhelming for the next decade. How do Stewardship Personal Values Portfolios manage climate risk?
ANSWERCH: As Saad mentioned, the Stewardship portfolios only feature companies that have above average or high ratings for Environment, Social and Governance. The investors pool their money to try to influence the decision makers. By proactively filtering out activities companies that are unfriendly to the environment like thermal coal and palm oil producers, our investors are giving a clear message that they will not allow their money to fund these types of companies. Even more so, Stewardship Portfolio investors along with all the other ESG oriented investors expect the Leaders of these companies to take the efforts to respect the environment with the hopes that one day, working together, we can have an impact on climate change.
QUESTIONHow do Stewardship Personal Values Portfolios determine which responsibly managed companies are well-positioned to provide strong long-term growth?
ANSWERCH: That’s an interesting question. Well really, the Stewardship fund follows the same process the parent company uses to determine the best investments for the future. The highly successful Seasons of Advice methodology and algorithms that have been used in the mainstream investments for decades are part of the approach for the Stewardship portfolios. The goal of all the company investments is to meet or exceed benchmarks net of fees. We are very proud of our results.
QUESTIONHow do you think the Stewardship Personal Values Portfolios will evolve over time since the industry seems to be moving in the direction of “green/ethical investing”?
ANSWERCH: We are already working on Stewardship 2.0. We now have the technology for consumers to custom build a portfolio by selecting from a long list of what are called impact items. Specifically molding the investments to further customize target goals such as focusing on women’s and diversity issues as well more focused client issues.