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Merrill, Morgan Stanley: Sustainable Investing Can Work – Financial Advisor IQ
By Murray Coleman
December 9, 2015
Do-gooder clients are out in force these days, demanding both competitive investment returns as well as portfolios built with some sort of social relevance. But new research from analysts at Merrill Lynch and Morgan Stanley suggest that advisors with solid grounding in the fundamentals of today’s fast-expanding marketplace of socially responsible investing can indeed have their cake and eat it, too.
“As more and more new research comes out, conventional wisdom that SRI-type companies don’t outperform when compared over the longer-term with the S&P 500 and other non-socially conscious benchmarks is changing,” says Matt Papazian, a partner at Cardan Capital Partners in Denver.
In a study published this spring by Morgan Stanley, researchers found that in the past quarter-century, the popular MSCI KLD 400 Social Index beat the blue chip S&P 500 by an average of 0.45% a year.
“The growing number of socially responsible strategies coming to market means that clients can now invest in funds covering almost every asset class — they don’t have to miss out anymore,” says Papazian, whose team recently moved from Merrill Lynch, where they managed $725 million. Still, he adds, such a wave of new products brings with it a requirement that advisors “take more time to do their due diligence and take a very selective approach” to make a real impact for clients.
Meanwhile, last month Morgan Stanley’s analysts issued a separate report digging deeper into how important being highly selective can be in putting together impactful portfolios for clients. In particular, the firm’s researchers predict that companies providing healthier products and serving an aging demographic — such as a select group of natural foods providers and senior housing specialists — will exhibit the best risk-return benefits over the next several years. Stocks tied to overcoming water scarcity and supportive of improving environmental lifestyles were also rated highly.
The parade of new research also includes a Merrill Lynch analysis of clean tech-related industries released earlier this month. The report, which served as a follow-up to a broader 49-page August review of sustainable themes, forecasts a market of more than $13.5 trillion for low-carbon energy stocks by 2030. The “Call to Action” listed wind, solar, batteries and “next generation” autos as some of the most lucrative places to invest in the future.
Morgan Stanley and Merrill aren’t alone in rolling out new research into the state of impact investing. UBS has also been highlighting fundamental growth opportunities across different sustainable investing themes, including a recent 31-page special fourth-quarter investment review of such opportunities.
Still, UBS advisor Kathy Leonard sees a bigger picture message coming from the bank’s latest round of analysis on sustainable investing. “It’s worth monitoring different parts of the market, but extrapolating past returns in a world where technology is changing so rapidly isn’t a great way to make long-term investment decisions,” says the Boulder, Colo.-based FA.
Companies showing more awareness of environmental, social and governance issues are generally positioned to make better long-term business decisions, argues Leonard, who manages more than $200 million. So instead of emphasizing a few strategic areas, Leonard starts with a core portfolio covering a wide swath of the ESG marketplace. Then, more niche-type funds are added or subtracted to emphasize a client’s personal preferences. “The challenge is to get clients to not forget about the basics of investing and become too concentrated around a few popular themes,” she says.
A host of new software applications is also bringing more in-depth data on the strategic prospects for SRI investors, helping advisors break down client allocations in greater detail, says Brent Lindell of Rockford, Ill.-based Savant Capital Management, which manages about $4.5 billion.
The independent RIA’s taking advantage of third-party analysis tools provided by outside researchers at Morningstar, IW Financial and Sustainable Holdings. Asset managers likeDimensional Fund Advisors and TIAA-CREF are also offering him more support to “do a deeper dive” into clients’ ESG holdings, says Lindell.
As a result, the Madison, Wisc.-based advisor believes such research is helping him to set his practice apart from competitors in the SRI realm. “As interest in socially responsible investing gains momentum, we’re seeing a flood of new products entering the market,” says Lindell. Good research in this area, he adds, helps him discern genuine and effective SRI from “me-too funds that promote sustainable investment themes, but on closer review actually fall way short.”