Surveying the current landscape, it’s hard to say, with any confidence, which way the economy is heading.
Back in January, the inflation rate was around 6%, but making a steady¹ climb down the mountain; then, this summer, it looked like inflation was reversing course again². Interest rates, which had been spiking upward, took a pause in July at 5% (the overnight rate)³ — and the Bank of Canada has continued to hold⁴ at that rate. But it might not be done with its rate hikes quite yet.
In this dynamic economic environment, investors are looking for greater certainty in their portfolios. And while there are no sure things in this global economy, one method of reducing risk in an uncertain world is diversification. Impact investing — with its focus on companies that create a net-positive impact on our world — is one such way of achieving that diversity.
Here are three reasons why impacting investing is a great way to weather uncertain times as an investor:
Different kinds of companies in the mix help reduce your portfolio risk
Having too much concentration in one company or sector⁵ is a major risk for investors — so finding ways to diversify is critical. Sustainable investments, particularly impact investments, offer access to companies and sectors that aren’t traditionally included in many index or mutual funds.
Here at Genus, we offer a spectrum of sustainable investing strategies — from those that include companies reducing their environmental or social risks to those, more strictly, that are making a net-positive impact on the world (which we track with our Net Impact ScoreTM). We evaluate all of our investments according to the United Nations’ Sustainable Development Goals (SDGs), which cover social goals (such as eradicating poverty) as well as environmental goals (such as improving access to clean water and energy); the Net Impact Score is derived from that.
By holding some impact funds, you get access to non-traditional companies and help reduce the concentration risk, says Lisa Zhang, Head of Equity Investments and a partner at Genus. “In our latest impact portfolio holdings, out of the entire portfolio, about 60% of the companies are different from other funds we hold. This is a big differentiation.”
Investing in sectors that are longer-term plays also means less volatility
By definition, the type of companies that are committed to building a clean-energy infrastructure or eliminating poverty are in it for the long haul; there are no short-term fixes to these kinds of long-term problems. “We believe, with an impact strategy, we can achieve persistent long-term performance as well as positive long-term impact on the planet,” says Zhang.
She notes that investments in Genus’ impact fund are also more defensive by nature — meaning they are not tied to sectors such as energy or financials, which tend to be more affected by economic volatility. “We have more exposure, or we have more active tilts toward defensive sectors such as health care and consumer staples.”
So if you’re getting exposure to energy and financials in another fund, then an impact fund can effectively act as a hedge against that volatility.
That was certainly borne out last year, when energy markets were particularly volatile in the wake of Russia’s invasion of Ukraine. While the benchmark MSCI World Index was down nearly 12% in 2022, the Genus Impact Fund was down less than 2%. “So it beat the benchmark by almost 10%,” says Zhang. “That’s a big win — and a good hedge.”
Impact investments are well-positioned to capture a growing consumer trend
The recent rise in the price of oil has impacted the cost⁶ of everything — from food to transportation to travel — which means less take-home pay for consumers, and a higher cost of doing business for companies around the world. But the news is not all bad, especially for impact investors.
Triple-digit oil prices⁷, if they persist, could have a longer-term impact on consumption habits. That means people will be driving less, emitting less and pursuing alternative forms of transportation — as well as alternative fuels for their homes and businesses. Even before the recent rise in oil prices, people around the world were flocking to electric vehicles: globally, EV sales exceeded 10 million in 2022⁸, representing a total of 14% of all new cars sold — up from around 9% in 2021 and less than 5% in 2020.
Impact funds, like the ones we offer, provide a variety of ways to capitalize on this trend. One of the best examples of our impact investments set to ride the EV wave is Enphase Energy, a publicly traded technology firm that develops and manufactures solar micro-inverters, battery energy storage and EV charging stations.
Active management is the hallmark of impact investing
It seems increasingly clear that interest rates will stay elevated well into 2024 — and perhaps much longer⁹. That tends to put a damper on economic growth¹⁰, and will impact many companies’ performance. In this kind of environment, it’s more important than ever to have active portfolio management: a hallmark of any impact investing strategy.
Our team of portfolio managers has a systematic approach to analyzing stocks, and rebalances portfolios monthly based on prevailing conditions. “We watch the market closely to determine what sectors and countries we want to invest in based on a technical analysis,” says Lisa Zhang. The team also closely monitors world events, like the recent war in Ukraine and the collapse of regional banks in the U.S., to make sure portfolios are positioned for the future.
The future remains unwritten, of course, and uncertainty remains the operative word for the months ahead. But perhaps no investment strategy is better suited to position investors for that future — both from a risk management perspective, but also from a net-positive impact on our planet — than impact investing. And moving to an impact portfolio is easier than ever.
Interested in learning how you can add impact investments to your portfolio? Contact a Genus advisor today.
References
Consumer price index (no date) Bank of Canada. Available at: https://www.bankofcanada.ca/rates/price-indexes/cpi/ (Accessed: 01 November 2023).
- Rendell, M. (2023) Canada’s inflation rate rises to 4% in August, putting pressure on BOC, The Globe and Mail. Available at: https://www.theglobeandmail.com/business/article-inflation-rate-canada-august-2023/ (Accessed: 01 November 2023).
- Bank of Canada raises policy rate 25 basis points, continues quantitative tightening (no date) Bank of Canada. Available at: https://www.bankofcanada.ca/2023/07/fad-press-release-2023-07-12/ (Accessed: 01 November 2023).
- Parkinson, D. (2023) Opinion: Bank of canada signals that its interest rate moves are working, albeit slowly, The Globe and Mail. Available at: https://www.theglobeandmail.com/business/commentary/article-bank-of-canada-signals-that-its-interest-rate-moves-are-working-albeit/ (Accessed: 01 November 2023).
- Strategies for managing a concentrated stock position (no date) BlackRock. Available at: https://www.blackrock.com/us/financial-professionals/concentrated-stock (Accessed: 01 November 2023).
- How higher oil prices could pump more money out of your wallet this fall | CBC News (2023) CBCnews. Available at: https://www.cbc.ca/news/business/rising-oil-prices-implications-2023-1.6974866 (Accessed: 01 November 2023).
- News, D.P.M. (2023) Oil at $100 is too high, even for energy companies, The Wall Street Journal. Available at: https://www.wsj.com/business/energy-oil/oil-at-100-is-too-high-even-for-energy-companies-e1f8f8ca?st=bxh4m7suvesp2jk&reflink=article_copyURL_share (Accessed: 01 November 2023).
- Iea (no date) Executive summary – global EV outlook 2023 – analysis, IEA. Available at: https://www.iea.org/reports/global-ev-outlook-2023/executive-summary (Accessed: 01 November 2023).
- Higher interest rates not just for longer, but maybe forever (2023) The Wall Street Journal. Available at: https://www.wsj.com/economy/central-banking/higher-interest-rates-not-just-for-longer-but-maybe-forever-d5891964?page=1 (Accessed: 01 November 2023).
- How do rising interest rates affect the stock market? (2022) U.S. Bank. Available at: https://www.usbank.com/investing/financial-perspectives/market-news/how-do-rising-interest-rates-affect-the-stock-market.html (Accessed: 01 November 2023).
