Market Commentary

Back to the Future

April 2017

"Success is more permanent when you achieve it without destroying your principles."
- Walter Cronkite

Flux Capacitor

The world feels in flux. Changes at the helm of political ships at home and abroad appear to be steering in precarious directions. But, simultaneously, we’re observing a positive and growing tidal shift at various investment conferences that is bringing ESG investing to the foreground. Even the CFA Institute, a notoriously quantitative group of investment professionals, recently wrote that "There is a growing realization that whether motivated by economic value or moral values, ESG (Environmental, Social and Governance) issues are relevant for all long-term investors."¹ As stewards of our clients’ capital, we are encouraged by this integration between value-motivated and values-motivated investors.

In the first quarter, our client portfolios built on the growth we saw last year. This was led by a resurgence in the international stock markets and in emerging market stocks – an area of opportunity we highlighted last quarter and where we still see value. The MSCI Emerging Markets index increased 11.5% in the first quarter, outpacing the MSCI World Index, a broad measure of advanced-country stock market performance that increased about 6.5%. Both of these international markets quietly outperformed large domestic stocks. The S&P 500 first-quarter total return was a little over 6.0%.

This first quarter has also given us an early lens into how President Trump will act and how markets will react to his actions. So far, we’ve seen an administration that is finding counterweights inside its own party, with an agenda that won’t be pushed through without debate.² The markets have reacted favorably in the face of various missteps or PR gaffes³ and remain optimistic about tax reform and infrastructure still coming down the pike. The recent trade rhetoric and concern about excessive dollar strength further bolsters our growth outlook for emerging and international markets.

As for values-based investing – the concept isn’t new, as seasoned advisors might note to the chagrin of virtuous millennials. So, why now? Recent months and years have given us two core catalysts.

The first, which happened slowly, is the growing awareness of the impact that carbon emissions have on the environment. The volume of scientific research and media coverage has broadened awareness, leading to an acceleration of disruptive sustainable energy technologies: solar power consumption has grown at nearly 140% per year over the last 5 years.⁴ This creation of economic value attracts more investment capital, which further advances the sustainable energy transition.

The second catalyst, which happened suddenly, was the recent election of President Trump. This furthered the desire of many people to align themselves more explicitly with a progressive set of companies and investments, by supporting environmental organizations, social progress, and equitable governance practices. Today, nearly one-fifth of assets managed in the U.S. are invested with some level of ESG integration. As Barron’s recently commented, "As Trump’s policies take hold, it’s worth watching how ESG investing takes root."⁵

The Old is New Again

Phillip Fisher authored Common Stocks and Uncommon Profits in 1958.⁶ A highly regarded investment handbook, it outlines 15 points to consider when analyzing a company’s stock. Most deal with typical financial considerations: Does management have a strategy to grow the company? How profitable is the company relative to its industry? Two points are worth particular consideration, though, for investors concerned with a company’s impact on the environment, its community, and social issues:

#7 Does the company have outstanding labor and personnel relations?
#15 Does the company have a management of unquestionable integrity?

Long before a nomenclature developed for "socially responsible"⁷ or "ESG" investing, investors recognized that a company that treated their employees well, nurtured good relations with the communities within which they did business, and avoided environmental and regulatory mishaps could have a competitive advantage, and thus make that company’s stock a better investment. The importance of such a stance of integrity by company management was well understood by Fisher.

Governance issues have long been of primary importance to value-motivated investors. Values-motivated investors expand on that concern to include Environmental and Social issues as more explicit considerations in asset selection.⁸ We see this as analogous to eating a vegetarian diet – you might choose to do so for health reasons (value), or you might choose to do so for religious or moral reasons (values). The diet may be the same, but the motivation is different.

We would not prescribe a diet to any of our clients, but we want to offer appropriate choices when it comes to value and values-based portfolios. Whatever your concerns or motivations in this area, we seek to provide a well thought out approach to aligning your dollars with your values. As more innovation happens in this space, we will continue to expand what we can offer to our clients, and we welcome thoughtful conversation about your goals and values.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

1.CFA Institute, 2015 "Environmental, Social, and Governance Issues in Investing"
2. Scott Wong, "GOP infighting imperils agenda", The Hill, 4/12/17
3. www.factcheck.org
4. U.S. Energy Information Administration; Renewable Energy Production and Consumption by Source
5. Reshma Kapadia, "A New Era of Sustainable Investing Emerges," Barron’s, February 11, 2017
6. "Common Stocks and Uncommon Profits" was the first investment book ever to make the New York Times bestseller list.
7. Early socially responsible investing began with religious institutions eliminating investments related to alcohol, gambling, and tobacco – or “vice” stocks. Those categories quickly expanded to other considerations of progressive social issues, leading to the more recent title of “ESG” investing, standing for Environment, Social, & Governance concerns. Even more recently, the titles sustainable, restorative, and impact investing have been used, depending on the extent to which investors are attempting to have a positive impact versus screening out negative behaviors.
8. CFA Institute, 2015 "Environmental, Social, and Governance Issues in Investing"