2. Todayโs Conversation Topics
Your role as an Asset Owner
Investment Advisor - Trusted Team Member and Service
Provider
Overview of Asset Allocation & Performance
Expectations
Where are the easy opportunities for Mission Related /
Impact Investing?
Where does mission and performance meet for a win-
win in the road ahead?
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3. Your role as Asset Owner
Itโs a lifelong long journey
Learn the language of investing
Define and align to your goals and values
Understand your risk tolerance
Know your liquidity needs
Stay current on performance expectations
Build a team (redundancy is ok)
Self-actualization refers to fulfilling oneโs individual
potential: Maslow's hierarchy of needs.
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5. Investment Advisors โ
Trusted Team Member and Service Provider
Itโs a relationship based on trust and transparency
They are service providers โ itโs their job to understand your goals
They are paid on financial performance (which means this is really their job)
Create the conversation - send them resources, request review meetings
Expect Evolutionโฆ(require it)
A source for education โ Ask for examples, references, comparisons and plain English
Manager performance is different from investment performance!!! (more on this)
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7. Asset Allocation & Performance Expectations
Asset allocation strategies are established to meet the individual needs of each
investor based on their time horizon (the amount of time their dollars will be
invested), risk tolerance and liquidity requirements.
As a result, there is no 'one size fits all' when it comes to asset allocation strategies
and the investment options available to meet them.
Yale Model Asset Allocation
Research shows that it's the asset allocation of investments that accounts for nearly 92% of
the variability of returns for the total portfolio holdings.
This is because each asset class has distinct characteristics and, historically, reacts
differently under the same market conditions.
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8. Benchmarks
Benchmarks are passively managed portfolios of financial assets
Benchmark are often expressed as an index that serves as the measurement yardstick for a
portfolio by comparing portfolio characteristics such as returns, risk, component weights and
exposure to sectors, styles and other factors to the benchmark.
To be effective, a benchmark should meet most, if not all, of the following criteria:
Unambiguous and TransparentโThe names and weights of securities comprising a
benchmark should be clearly defined.
InvestableโThe benchmark should contain securities that an investor can purchase in the
market or easily replicate.
Priced dailyโThe benchmarkโs return should be calculated regularly.
Availability of historical dataโPast returns of the benchmark should be available in order to
gauge historical returns.
Low turnoverโThere should not be high turnover in the securities in the index because it
can be difficult to base portfolio allocation on an index whose makeup is constantly changing.
Specified in advanceโThe benchmark should be constructed prior to the start of evaluation.
Published risk characteristics โ The benchmark provider should regularly publish detailed risk
metrics of the benchmark so that the investment manager can compare the actively
managed portfolio risks to the passive benchmark risks.
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9. Performance Attribution โ Active returns
The difference between the portfolio return and the benchmark return is known as the
active return. The active return is the component of a portfolio's performance that
arises from the fact that the portfolio is actively managed.
Portfolio Benchmark Portfolio Benchmark Asset Stock Interaction Total
Weight Weight Return Return Allocation Selection Active
Equities 90 70 5 3 0.12 1.4 0.4 1.92
Cash 10 30 1 1 0.28 0 0 0.28
Total 100 100 6 4 0.4 1.4 0.4 2.2
The attribution analysis dissects the value added into three components:
Asset allocation is the value added by under-weighting cash (0.28%), and over-
weighting equities (0.12%). The total value added by asset allocation was 0.40%.
Stock selection is the value added by decisions within each sector of the portfolio. In
this case, the superior stock selection in the equity sector added 1.40% to the
portfolio's return.
Interaction captures the value added that is not attributable solely to the asset
allocation and stock selection decisions
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10. Alpha โ How investment managers rank their performance
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is
the return in excess of the compensation for the risk borne, and thus commonly used to
assess active managers' performances.
Often, the return of a benchmark is subtracted in order to consider relative
performance, which yields Jensen's alpha.
ฮฑi < 0: the investment has earned too little for its risk (or, was too risky for the
return)
ฮฑi = 0: the investment has earned a return adequate for the risk taken
ฮฑi > 0: the investment has a return in excess of the reward for the assumed risk
For instance, although a return of 20% may appear good, the investment can still have a
negative alpha if it's involved in an excessively risky position.
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14. Opportunities for Mission Related / Impact Investing
Yale Model Asset Allocation
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15. MRI / Impact Investment Spectrum
Traditional Investment Models
Mission Impact First Finance First Profit Only
Intent Philanthropic Impact with Market rate Maximize
below returns with profit
market some impact
returns
Impact
return High Low
Financial
return Low High
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