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September 2020 investment update

August was the month that all nine of our global multi-asset models went into positive territory on a YTD basis. While we are happy with the performance, our main focus remains on avoiding market downturns and thus minimising portfolio volatility.

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Dolfin shortlisted twice in Citywealth’s Future Leaders Awards

Investment Associates, Anny Giavelli and Joseph Casanova have both been shortlisted in this year’s Citywealth Future Leaders Awards.

Impact investing

In this latest excerpt from our Q1 2020 investment outlook, Dolfin Investment Associate Anny Giavelli looks at how the impact investing market continues to grow and mature as demand for social change rapidly increases.

10 March 2020 / Sectors & themes

The impact investing market continues to grow and mature as demand for social change has been rapidly increasing. At a time like now, when the world is experiencing climate emergencies and facing disastrous impact of global warming of 1.5 degree Celsius above preindustrial levels, this type of asset becomes even more relevant. The United Nations Sustainable Development Goals (SDGs) have been defined since 2015 to provide the industry with a clear measurement reference and the UN has estimated that between $5tn and $7tn is required annually to help achieve its 17 goals and 169 associated targets by 2030.

Many investors are not aware that it does not form part of Environmental Social and Governance (ESG) strategies.

Impact investing is defined as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return, according to the Global Impact Investing Network (GIIN). It is distinct from philanthropy in that it seeks a financial return. It is also different from negative screening strategies, which aim to minimise negative impacts by eliminating certain categories of investments. Many investors are not aware that it does not form part of Environmental Social and Governance (ESG) strategies, which assess environmental, social and governance factors.

In 2019 a few key cornerstone events contributed to establish principles for impact investing. In April, the GIIN released “Core Characteristics of Impact Investing” to offer the financial markets more clarity on the major pillars of impact investing practice. In the same month the International Finance Corporation released the first group of signatories to its Operating Principles for Impact Management, providing guidance on the investment lifecycle, strategy, structuring and portfolio management. In August, the Principles for Responsible Investment published the Impact Investing Market Map to help institutional asset managers and funds assess impact investment opportunities in listed equities, growth-stage and mature companies. It defines 10 social and environmental themes aligned with the SDGs.

According to the data provided by GIIN, the overall impact investing industry AUM is estimated at $502bn managed by over 1,340 active impact investing organisations as at the end of 2018 and we expect that number to continue to grow. Asset managers account for about 50 per cent of estimated AUM, meaning impact investors tend to invest via specialised managers including venture capital, private equity, fixed income, real assets and public equities. Development finance institutions account for just over a quarter of the total AUM. Others include banks, pension funds, insurance companies, foundations, family offices and HNWI. More than 50 per cent of active impact investors made their first investment in the past decade.

According to the latest GIIN survey, more than 90 per cent of respondents have reported that their financial expectations have been met or exceeded.

The majority of investors target market rate-return. According to the latest GIIN survey, more than 90 per cent of respondents have reported that their financial expectations have been met or exceeded, while 98 per cent have also achieved their impact social return. Despite the concern of some investors regarding a potential conflict between financial returns and impact, the two are mutually supportive based on the track record the industry has been building using a fundamentals based investment approach.

The asset allocation strategy is very diverse across the industry. Half of the total assets are allocated to emerging markets and half to developed markets. The sectors with highest assets allocated are energy with 15 per cent, microfinance with 13 per cent and other financial services with 11 per cent. Inclusive financial services providing credit, banking services and insurance products to unbanked and low-income populations are essential to improve individual and community autonomy. Education is also gaining attraction from both social enterprises and impact investors. According to the UNESCO Institute for Statistics, one in five children around the world is currently out of school, while just 0.5 per cent of global spending on education goes to low-income countries.

The increasing social and environmental awareness of investors will continue to drive the sector. As the next generation of high net worth individuals take the reins at their family offices, they continue to urge the previous generation to allocate additional wealth into impact investments instead of the traditional philanthropy, which is becoming an outdated model. According to a recent Bank of America Private Bank survey, 93 per cent of millennials believe social or environmental is important to investment decisions and 66 per cent work for or own a company that integrates ESG factors into its products, services and policies. They see their family wealth as a strong tool to provide solutions to the urgent social problems they have inherited. They demand their asset management strategy be aligned with their social  values and they seek to shift the focus of capitalism to address global issues. The transfer of wealth from older generations to the younger ones is estimated to reach $24tn this year.

The market is creating new structures that blend philanthropic goals-based funding solutions with private sector capital market instruments.

To advance impact investing even further requires more transformative innovation. The market is creating new structures that blend philanthropic goals-based funding solutions with private sector capital market instruments. There are also social enterprises that demand more innovative and flexible funding structures. Big financial institutions’ efforts are needed in order to bring impact into mainstream capital markets and integrate it into core financial products. The accessibility of such products will need to be improved by developing and providing products suitable for a broader spectrum of investors including retail. More services and tools also will need to be provided by big players from investment banks, rating agencies to data providers to integrate impact element into investment analysis, asset allocation strategies and deal origination.

The market will have to demonstrate its effectiveness and feasibility at scale, in terms of both progress against social and environmental challenges and the ability to generate financial return. Furthermore, the market must address the lack of a commonly accepted or understood segmentation, which has created constraints on the deployment of investment capital. Successfully scaling impact investing as both an industry and a movement will bring positive changes to society, but it will require a collective effort and leadership from many organisations.

A more favourable policy and increased regulation will also accelerate the market’s growth. A clearer regulatory framework for investing will boost more confidence in impact sectors. Providing tax benefits or other financial benefits for impact investment will also encourage the creation of more social enterprises and attract more investors.

It will be unacceptable to make investment decisions without at least considering the impact on society and the environment.

We believe that in the future it will be unacceptable to make investment decisions without at least considering the impact on society and the environment. This type of practice has been embraced by both impact investing ecosystem members and regulatory bodies and organisations such as the CFA and the World Bank. It will reshape both investors’ behaviour and financial markets. More determination and commitment will be required in order to change the current status quo. The current collective challenges are many and urgent, from greenhouse gas emissions at their highest level in history to unequal wealth distribution, from inadequate water supply to food waste.

Many of our clients have expressed a strong interest in having a component of their portfolio in impact investments. One of the issues is the lack of accessibility for retail investors as much of the impact market space remains in less liquid or illiquid investment opportunities. Our Private Investment Club aims to tackle this by including some impact related investments.

This article is an extract from our Q1 2020 investment outlook which looks back at the performance of our model portfolios in the preceding quarter, shares how we expect markets to react in the months ahead, and puts a spotlight on some investment themes and ideas with great potential. To download your complementary copy, visit this page.

To find out more about impact investing, join us for our Q2 2020 investment conference.

 

 

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In this excerpt from our Q1 2020 investment outlook, Dolfin Senior Investment Manager Anton Kapkin looks at some of the recent trends and developments affecting the global venture capital market.

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