Beats | June 4, 2019

Wealthy families seek – and find – market-rate returns from ‘values-aligned’ investing

Jean Haggerty
Guest Author

Jean Haggerty

ImpactAlpha, Jun. 4 – Values-aligned investment strategies – including impact investing – are delivering risk-adjusted market-rate returns, according to a survey by the Family Office Exchange, a network of 350 wealthy families.

It was FOX’s first deep-dive survey on the families “values-aligned” investments, which span “responsible” and “sustainable” strategies using public market investments, and more deliberate “impact” strategies, generally through private investments.

Significantly, the families surveyed indicated there may be more capital available for impact investments than investment opportunities. As market uncertainty looms, values-aligned families are looking to direct investments to boost returns. The survey found families are planning to double their focus on direct investments.

“Families are also less concerned with diversifying concentration risk and seek to make a deeper, personal connection with fewer recipients of capital,” according to report. “Families are allocating significant capital in meaningful ways when they find the right opportunities, and the market needs to prepare accordingly.”

Market rate

The survey’s findings upend perceptions held among its members that values-aligned investments provide only concessionary – or below market – returns. “Not only are investors expecting market-rate returns on these investments, over 80% of their investments have met or exceeded both their financial and social or environmental return targets,” FOX’s Paulina Cromwell told ImpactAlpha.

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“Market-rate” is by far the most common financial target among current investors across the full spectrum of values-aligned investments, from responsible and sustainable investing to impact investing.

The shift to values-aligned investment strategies is being led by later generations. This suggests that there will be a pivot to a new cultural norm as the next generation takes the helm, Cromwell said. Families farther removed from the generation that created the wealth are disproportionately integrating their values into their investments, she added. FOX found that one-third of families making values-based investments are four or more generations removed from the generation that created the wealth.

“It will be interesting to see if this difference in behavior between inheritors versus wealth creators goes away over time, as members of the rising generation are cementing values-aligned investing as a new cultural norm,” Cromwell said.

FOX’s survey found that 36% of families that have already deployed values-aligned capital have made direct investments, and plan to roughly double their allocation. Also, 18% of those families currently invest in individual securities from a values-aligned perspective, and 36% plan to do so going forward.

Of the 98 family offices that participated in FOX’s survey, 18% have more than $1 billion in investable assets, 20% of families have between $500 million and $1 billion, and 44% have under $250 million. On average, survey participants have allocated an average of 60% of their total investable assets to values-aligned strategies.

Appetite for impact

When it comes to values-aligned investing, the caliber of investment opportunities available presents a major challenge. “There is an incredible amount of dry powder out there right now,” Cromwell said, as asset owners look for products that meet their risk, return and impact expectations.  

Family offices are unique stakeholders. Unlike endowments and foundations, they are not constrained by external constituencies. “They don’t need to deploy capital. They can wait for high-quality and innovative investment opportunities before engaging,” Cromwell added.

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To date, direct investments have tended to be clustered in areas where families’ feel like they have a competitive edge. Often this means investing in the sector where the family created its original wealth. Food and agriculture and education, where many families have existing philanthropic ties, are most popular values-aligned investment sectors.

For its survey, FOX defined responsible investing as investment strategies that filter out certain types of investments and “do no harm.” Sustainable investing strategies, meanwhile, operate under a “do good” principle and seek to invest only in the most sustainable companies in each sector.

“Responsible” and sustainable investing strategies target financial return as their primary objective. Impact investment advance financial and social and/or environmental benefits as the primary objectives of its investment strategy.