Presentation on theme: "Lauryn Agnew Seal Cove Financial Spring, 2012"— Presentation transcript:
1 Lauryn Agnew Seal Cove Financial Spring, 2012 Investing to Impact Poverty A Research Study Initiated by the United Way of the Bay AreaLauryn AgnewSeal Cove FinancialSpring, 2012This research started almost 2 years ago, when a board member at United Way of the Bay Area asked about our social screens for the endowment and operating reserves portfolios. We had nothing in place and offered to research how we might add some appropriate screens to our investment process that would align with the mission of United Way and still provide comparable returns under our fiduciary duty responsibilities. Our research took 2 years but I will summarize it in the next 15 minutes. It was a fascinating process and a terrific opportunity for me to meet a lot of new people and develop a new passion.
2 Agenda Overview of SRI, ESG, Impact Investing Fiduciary Duty and UPMIFADefining a Process, Aligning with MissionBuilding a PortfolioTesting the PortfolioPoliciesImplicationsThe Investment Committee of the United Way of the Bay Area researched and developed the following process for constructing a model portfolio that would align with its mission to reduce poverty while also complying with traditional fiduciary standards.
3 SRI and ESG SRI: Socially Responsible Investing Exclude companies that make or do ‘bad’Tobacco, weapons, ApartheidProactively screen for ‘good’ companiesPublic equity spaceESG: Environmental, Social, GovernanceBusiness management strategies that mitigate future unknown risksProactive corporate responsibility and reportingPublic equity space and corporate bonds
4 Impact InvestingImpact Investing: an intentional strategy to align investments with missionCan include all asset classesSome asset classes bring bigger impactDefining the mission focuses the investmentsFiduciary duties consideredUPMIFA – the standard of conduct for fiduciaries of institutional assets like endowments, private foundations and quasi-public funds like UWBA
5 UPMIFA & Fiduciary Duty Uniform Prudent Management of Institutional Funds ActPrudent Person Standard, Whole Portfolio conceptConsider institutional characteristics for investment and spending policy (> 7% = imprudent)Its mission, duration and preservation, purpose, and its other resourcesLiquidity, expected portfolio return, general economic conditions, inflation (or deflation), monitor costsDuty of Loyalty – no conflicts of interestDuty of Care – to know and follow the laws
6 Aligning Investments with Mission UWBA Mission:To cut poverty in the Bay Area by ½ by 2020Investment Committee mission:To study and recommend a process and optionsFor building a diversified portfolioThat offers comparable risk and returnThat aligns with the poverty mission and Bay Area focus
7 Impact Investing Continuum White papers, attending conferences, networking, getting connected and introduced to people in the field.Program Related Investing (PRI) specific for foundationsPrimary motivation is social impact; financial return can varyMission Related Investing (MRI) specific for foundationsSupports missionReturns can vary; greater emphasis on competitive returnsImpact Investing * ESG/Sustainable * Triple Bottom LineMarket Rate (or greater) Financial Return + Social ImpactSource: Take Action ! For Impact conference panel
8 Impact Investing Themes (Source: Solutions for Impact Investors: From Strategy to Implementation, Rockefeller Philanthropy Advisors, p )
9 Impact Investing Process: UWBA Research Process UWBA Goal: Reducing Poverty in the Bay Area by ½ by 2020Community Development, Affordable Housing, Job Training, EmploymentQuantify jobs and growth, unemployment rates decline, affordable housing units built, transportation funding, etc..Develop Investment Policy: asset allocation, liquidity, risk budgeting, spending, monitoring, etc.Gather universe of ESG/Impact investment managers in all asset classes, model portfoliosPerform due diligence , monitor financial results, and social impact, test for comparable performance and risksArticulate Mission and ValuesCreate Impact ThemesDefine ImpactDevelop Impact Investing PolicyGenerate Deal FlowAnalyze Deals and Evaluate ImpactSource: Solutions for Impact Investors: From Strategy to Implementation, Rockefeller Philanthropy AdvisorsManager search led to Community Capital Management, met them at a conference.
10 Model Fixed Income Portfolio Community Capital ManagementCRANX: $1.2 billion, intermediate term, investment grade fixed incomeBenchmark: Barclays AggregateEarmarked bonds for CRA creditGeographically focused on SF Bay AreaTaxable Municipal Bonds, Redevelopment AgencyBay Area Small Business Administration bondsBay Area GNMA and FNMA Affordable Housing bondsSalvation Army (corporate)CDFI deposits in Bay Area* CRA = Community Reinvestment Act ** CDFI = Community Development Financial InstitutionCommunity Capital Management is based in Florida. The manage a fund for banks to meet their requirement to invest in their community due to the Community Reinvestment Act 40 years ago.
11 Building the Model Equity Portfolio Target Characteristics:TransparencyLow feeRules and Process BasedRisk and Returns must be competitive to a traditional market portfolioIndirect impact expected from public equitiesConsider SRI and ESG screensShareholder activism
12 Equity Universe BBACAX – Bloomberg Bay Area Index 383 companies headquartered in the Bay AreaCap weighted, Inception 2003Characteristics of the universe: Top 5 stocks = 50% of portfolioApple, Chevron, Oracle, Google, Wells Fargo
14 Analyzing the Model Portfolio Tracking ErrorBenchmark: Russell 3000Market cap rangeSector exposureAdd other large employers and donors to universeRoche (Genentech), Comcast, Franklin Templeton, Marriott, ATT, Bank of America, UPS, Macy’s, Costco, Nordstrom, Western Digital, and othersAdd but underweight more non-HQ Bay Area companies/employers
15 Model Equity Portfolio Structure Model portfolios:Cap WeightedEqual WeightedOptimizedTracking Error to S&P 500BBACAX BBACAX5.39% %15.68% %2.68% 2.82%Institutional consultants consider 5% tracking error to be appropriate for active strategies
16 Adding Social Criteria to the Model Portfolio Objective process for Social ScreensChoosing screensWeighting CriteriaCustomized ScoresData elements identifiedTesting for impactGeographical + Social screensTracking ErrorOur thanks to Aperio Group and IW Financial
17 Customized Social Screens 25 Categories – Focus Group consensus recommendationsAlignment with drivers of poverty reductionHighly Relevant to PovertyModerately RelevantLow RelevanceNot RelevantJob CreationLabor RelationsRecognition (Corporate)Human and Employee RightsWorkforce Diversity, including Sexual OrientationEnvironmentalCorporate Governance MetricsAuditing PracticesBoard AccountabilityBoard CompositionBoard IndependenceCEO CompensationCompany OwnershipShareholder RightsTakeover DefensesGamblingTobaccoAlcoholAdult EntertainmentAnimal TestingBioethicsFirearmsLife/ChoiceMilitaryNuclear PowerEnvironmental related to toxic spills prevention + managementLabor relations, employee and human rights as a proxy for treating and paying employees well, benefits etc.Gambling (on-line) is viewed as a negative above a 20% threshold of revenues for gaming companiesEnvironmental criteria based on prevention and management of toxic spills
18 Social & Geographic Criteria Focus Group consensus sample criteria recommendationsWeightings: High is 2x Medium, Medium is 2x LowExclusions: Gambling (use 20% threshold)Positive Scoring: based on objective dataJob Creation (High): defined by Universe of Bay Area employersCriteriaData ElementsImportanceWeighting% of TotalLabor RelationsEvaluation of relationships with organized laborHigh422%RecognitionWorkplace and DiversityDiversityTotal Workforce and ManagementMedium211%Sexual OrientationNon-discrimination Statement Same Sex BenefitsEnvironmentalToxic Release Information and SpillsHuman RightsGlobal Sullivan and Global CompactCorporate GovernanceGovernance Metrics Grades.
19 Tracking Error & Model UWBA Social Scores Objectives to balance and trade-off:Maximize our custom formula for ESG scoresDetermine a minimum portfolio Social ScoreMinimize tracking error to Russell 3000Determine a maximum tracking error – risk toleranceGeographic focus: HQ only or HQ focusedBay Area companies as % of portfolio100%, 75% or 50% of the portfolio must be HQ’d in Bay Area
20 Sample Portfolios: Bay Area 19% Bay Area Only -100% Bay Area Co's 75% of portfolioBay Area 50% of portfolioScreened Portfolio VersionR3000 Index1481013711BenchmarkR3000Model UniversesBBACAX+15+25% otherBBACAX % other+50% otherUniverse - Holdings2,9402521,982Standard Deviation20.4320.5720.6520.4820.5220.4920.4420.47Tracking Error vs. Benchmark, %0.002.413.021.361.951.640.671.32Model UWBA Social Score465165506049Bay Area Weight%1910075Number of Holdings294012699264178210450294Average Market Capitalization, $Billions87.980.093.289.089.589.891.6
21 Choosing the parameters for the Model Custom ESG Scores, Tracking Error, Geographic FocusModel UWBACustomESG ScoreTracking Error vs. Russell 3000
22 UWBA Model Portfolio “Impact Bay Area” $4 million: 65% Equities, 35% Fixed IncomeBenchmarks: R3000, Barclays AggregateFixed Income: Bay Area bondsImpact Report: to be developedSomeday?An “Impact Bay Area” family of funds:Stocks, bonds, private equity, infrastructure, venture capital, real estateModel UniverseBBACAX+15+25% otherRussell 3000 IndexUniverse – Holdings1,9822,940Standard Deviation20.4920.43Tracking Error vs. Benchmark, %1.640.00Model UWBA Social Score6046Bay Area Weight%7519Number of Holdings2102940Average Market Capitalization, $Billions89.587.9Changes to the Investment Policy Statement requires Finance Committee and Board approval. We can implement the fixed income portion without needing to change the policies. Developing the language and understanding the issues facing the board will hold off the implementation of the equity portfolio but we can track the results on paper and share the information in a public discussion going forward.
23 ImplicationsMarket rates of returns + positive social impact can bring fiduciary assets like defined benefit plans and community and private foundations to impact investingInfrastructure investingTransportation oriented affordable housing developmentLong term funding + source of liquidityPublic/Private PartnershipsPledge 1-2% to local/regional investmentsThe DB plans in the Bay Area – SF, Marin, Sonoma, San Mateo, San Jose City and Police and Fire, Contra Costa, Alameda, and the private foundations like the Hewletts and Packards, and E-Bays and Googles’ founders’ foundations, and the Community Foundations of San Francisco, Silicon Valley, East Bay and Marin total over $40 billion – getting 1-2% of that intentionally invested in the Bay Area would not damage global asset allocation and diversification policies. IN fact, the Bay Area is the 19th economy in the world, at XX% of global GDP. Of course we already own Bay Area stocks. Searching for Infrastructure investments locally and regionally rather than globally would have a significant impact, providing a long term new source of funding and liquidity in a time when our municipalities are not able to make standard investment in infrastructure, transportation and affordable housing. Working with both non-profits where I see such good work being done on the ground, in neighborhoods, and from the public side where I see such concentrations of assets, I could see the opportunity to promote public private partnerships to fund solutions to some of the Bay Area’s problems. Policy changes and education are needed to get trustees to be open to considering non-financial criteria, like social issues and missions, in their fiduciary duties – and the DOL and courts have agreed but it’s not adopted by sitting trustees who still feel ‘maximizing performance’ is our sole duty.
24 With nearly three decades of experience in developing and implementing strategies in the institutional investment industry, Lauryn Agnew serves as a resource to non-profit organizations for investment consulting services and provides fiduciary education and trustee training for public fund and non-profit board and committee members. She also offers strategic marketing analysis and recommendations to firms with specialized investment strategies through her company Seal Cove Financial ( .Her investment experience includes the sell-side (Smith Barney and Lehman Brothers in institutional equity sales on the trading desk), the buy-side (Harris Bretall and Wentworth Hauser and Violich, as director of sales and marketing), and forming her own consulting firm as well as co-founding two investment management companies: a hedge fund and an asset management firm.Currently, Lauryn is a trustee on the Board of the San Mateo County Employees’ Retirement Association (SamCERA), a defined benefit plan with $2.5 billion in assets. She is the Chair of both investment committees at the United Way of the Bay Area and the Girl Scouts of Northern California, and is a member of the finance committee of the Immaculate Conception Academy of San Francisco. Born in Wyoming, Lauryn grew up in Montana and earned her BA degree in Economics from Whitman College in Walla Walla, Washington and her MBA in Finance from the University of Oregon. In the Bay Area, she is a member of the CFA Society of San Francisco and the Financial Women's Association of San Francisco.Please note: The United Way of the Bay Area was the initial seed ground for this study. It will follow developments in this new field with interest. UWBA has not endorsed and does not sponsor any particular investment strategy at this time.