Will impact investing hinder potential profits?

Investing, Asset Allocation
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May 2017
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It is a really interesting question, and in my reviews of the data there are not strong conclusions to offer yet.  But there are a few things to consider that may help inform your approach to this issue:

  • What "cause" are you pursuing?  It may be reasonable to assume that certain types of restrictions on investment choice will have more effect on returns than others.  For example, screening for companies that have more diversity on their corporate boards or employment rolls would not necessarily suggest any economic advantage or disadvantage to the company, but screening for companies that are committed to donating X% of their revenues or profits to charity would be selecting for companies that do have an economic disadvantage vs companies without that "extra" expense
  • If you are pursuing this investment goal via products like mutual funds, how do the fees within those funds compare to the options without a socially responsible approach?  It is generally the case that the more specifically tailored or actively managed a fund, the higher the expenses.
  • There are implications for diversification and volatility in this quest; applying a meaningful screen to the universe of available stocks (or funds) necessarily results in fewer choices, which may lead to risks of concentration by region, industry, and individual companies; concentration risk also tends to lead to higher expected volatility.
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