Want to add a portfolio investment that delivers solid returns and a social benefit? That’s the win-win promise behind impact investing, a nascent alternative-asset class that could grow into a $1 trillion market by 2020, according to projections by JPMorgan.
Coined by Antony Bugg-Levine, CEO of the Nonprofit Finance Fund and author of Impact Investing: Transforming How We Make Money While Making a Difference, impact investing targets companies and funds that create “positive social or environmental impact” right along with profits. It parts ways with socially responsible investing, a concept that dates to the 1960s, which typically relies on screening out unwanted industries, such as tobacco, alcohol, or those associated with the military.
Impact investing is just the latest in an expanding array of alternatives to ordinary investors — it’s what emerging market investments were 20 years ago, says Julia Sze, Director of Investments at Wells Fargo Family Wealth in San Francisco.
According to recent research from J.P. Morgan and the Global Impact Investing Network, investors are expected to commit $4 billion this year alone, with impact investments making up 5 percent to 10 percent of portfolios in the next decade. The challenge for category is that it’s still in its infancy, so some investors are wary of diving in.
Don’t want to wait? Here are six publicly traded impact funds that several experts I spoke to mentioned as promising contenders:
Parnassus Investments — Parnassus Equity Income Fund (PRBLX)
This fund’s five-, ten- and 15-year records are all in the top 5% of Morningstar’s large blend category. The investment philosophy of the Parnassus equity funds is “to invest in businesses that have increasingly relevant products or services, sustainable competitive advantages, quality management teams and ethical business practices.” The fund’s five-year annualized return is a stellar 4.93% compared to the S&P 500 with 0.39%, or the benchmark large blend category, which lost .25%.
Domini Social Investments — Social Equity Fund (DSEFX)
This fund ranked in the top 10% of its peer group for the 1-year and 3-year periods ended March 31, 2011. Domini’s thorough social screening and advocacy, which screens out unwanted industries and advocates for social and environmental standards have always been among this fund’s biggest strengths, says David Kathman, a Morningstar analyst.
Neuberger Berman — Neuberger Berman Socially Responsive Fund (NBSRX)
This fund has $1.8 billion in assets and invests in mid to large-cap companies that meet the fund’s social and environmental records. The fund has returned -2.9% over the past year, 15.9% over the past three years, 0.49% over the past five years, and 5.1% over the past decade.
Pax World Investments — Pax World Growth Fund (PXWGX)
This fund seeks long-term capital appreciation by investing in a portfolio comprised primarily of large cap companies with sustainable business models that are believed to offer above-average growth prospects. Like all Pax World Funds, the Growth Fund factors sustainable investing into its investment analysis and decision-making.
One of the bigger green funds, this fund stands out because it doesn’t invest in alternative energy companies, which have been hammered by competition from China, like many other green funds. In fact Portfolio 21 doesn’t own anything in the energy sector. That doesn’t mean it hasn’t been a volatile ride. The fund lost 61% in 2008, gained 49% in 2009 and then tumbled in 2010 and 2011. Its 5-year annualized return is -0.89% compared to the benchmark MSCI EAFE, which lost -3.71%.
If you want to have a socially conscious portfolio and diversify, you have limited options. That’s because most of the traditional socially responsible or SRI funds are large-cap funds. Appleseed is one of the top performers in the mid-cap category and had a 5-star Morningstar rating in both 2008 and 2009. “This is a good fund with a good record,” says Morningstar’s Kathman. The fund’s 5-year annualized return is 6.23%, compared to the benchmark Mid-cap Value category of 0.53%.
Not quite convinced? Check out ImpactAssets, a go-to resource for impact investing with information about investment managers’ social and financial performance, as well as the various funds offered. Ron Cordes, co-chairman of asset management firm Genworth Financial Wealth Management, launched ImpactAssets in 2009.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.