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Investors turn to academia to navigate green investing boom

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Growing interest in companies’ environmental and social performance is fuelling a push by academics to boost research on the subject, amid fears that investors are allocating capital using unsophisticated data.

The proliferation of funds with responsible investing strategies has spurred a push by investors for greater disclosure from companies alongside a burgeoning field of academic research.

Although it is still a niche part of the wider financial world, the market for environmentally friendly investment products is growing rapidly. For example, $77bn of green bonds were sold globally in the first half of 2018, according to recent research by credit rating agency Moody’s. That is up 7 per cent from a year ago.

At a conference next month, academics will meet for the first time to discuss the latest research on green and social investment. The inaugural gathering of the Global Research Alliance for Sustainable Finance and Investment comes a year after the network was set up by a group of academics in a bid to promote greater rigour and more academic research on impact investing.

Rob Bauer, director of the European Centre for Corporate Engagement at Maastricht University, who is one of the organisers of the Alliance and the conference, said that much of the existing information about companies’ ESG performance “is not developed to the highest quality and there are lots of unclear metrics . . . it requires feedback between investors and academics”.

Some investors are not asking enough questions about the data that they are using to make investment decisions, he added.

“There is a lot of blah-blah [about ESG] going on in the market, in my opinion, and academics have a role in showing that,” he said. “If you base your investment strategy on some of this data, you are fooling yourself.”

At the request of a group of major pension funds, Mr Bauer and other academics have already created a tool for real estate investors to measure the sustainability impact of property and infrastructure assets around the world, known as the Global ESG Benchmark for Real Estate.

Individual institutions are also engaging in academic collaborations.

UBS Asset Management has teamed up with Wageningen University in the Netherlands, City University of New York and Harvard University to develop impact measurement frameworks which guide its investing.

Dinah Koehler, UBS AM executive director for sustainable investment research, said: “Academics have built these kinds of models for other purposes — traditionally this kind of methodology has been used by policymakers; we are harnessing it for investors.”

Christa Clapp, research director at Norwegian climate science institute Cicero, said there was a risk of spurious accuracy in some of the models used by asset managers.

“We need to rethink how climate scenarios are produced and what information they offer, to make them more useful for investors,” she said. “If we don’t have academics in this space we will never really know how good the quality of data are because it is all in silos designed by private consultants.”

However there is cause for optimism, she added — in particular, the rise of postgraduate academic courses in sustainable finance and similar subjects is “very helpful” in injecting more rigorous thinking into the impact investing industry.

Phil Renaud, executive director at Ohio State University’s the Risk Institute, said that investors’ growing desire to better understand the social and environmental impacts of the companies they invest in was driving the rise of risk research as an academic specialism.

“Over the past two or three years it has found its way into the work we do quite significantly,” he said, adding that greater data standardisation was “imperative”.

“The frustration is, how do we normalise this and put everyone o nto the same level so that the results [from analysis of companies’ performance] are valid and comparable?” he said.

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Rebalancing: A simple, if unappreciated, way to enhance investing

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The bull market in stocks has been running for nearly eight and a half years — one of the longest upward stretches ever. Have you rebalanced your portfolio lately?

You might want to think about rebalancing to lower your risk and possibly improve performance. This buy-low, sell-high approach can help you stick to a plan and overcome harmful psychological tendencies.

Yes, psychological. Rebalancing can be an effective way to deal with greed, fear and indecision.

“Consistent rebalancing is a reliable, and often underappreciated, source of higher risk-adjusted performance for the patient investor,” wrote Brent Leadbetter and two colleagues at investment firm Research Affiliates in a recent report.

It can help investors overcome the natural tendency to wait and see before tweaking their investment mix.

How rebalancing works

It’s a fairly simple concept: With rebalancing, you occasionally want to cash in some profits on high-flying stocks or other assets, then reinvest the proceeds in laggards. The idea is to bring your overall portfolio back in line with a suitable long-term mix that’s suitable for you. Rebalancing assumes you have a target mix of stocks, bonds, cash and other investments and want to stick with it.

Suppose you earlier decided that a split of 60 percent stocks/stock funds and 40 percent bonds/bond funds is a good mix. If you’re currently sitting at 65 percent/35 percent, for example, you might want to pull assets equal to five percentage points from stocks and reinvest them in bonds, to get back to that 60/40 position.

Stock prices have tripled since the long bull market began in March 2009. Consequently, you might have a bit too much in stocks, especially as you’re older now and presumably want a less-volatile portfolio.

“The biggest advantage of rebalancing is that it helps you manage risk,” said David Fernandez, a certified financial planner at Wealth Engineering in Scottsdale. “The U.S. stock market has done so well lately that, if you’re not rebalancing, you’ll wind up with a portfolio that’s heavily concentrated in (large) U.S. stocks.”

Behavioral issues

A less-obvious aspect to rebalancing is that it can help investors overcome psychological tendencies that can prove harmful.

Greed is one. As explained by the Research Affiliates report, when investors are sitting on large paper profits in the stock market, they could become susceptible to the “house money” effect. This explains the tendency of casino gamblers on a winning streak to stay too long at the table. So too with many stock-market investors.

Fear of missing out is another. Many of us tend to remain heavily invested in stocks even when it becomes more risky to do so, out of fear that our friends will keep bragging about all the money they’re making if the market keeps rising.

People are “evolutionary wired to follow the herd,” said the Research Affiliates report. That is, nobody wants to feel stupid, or even ostracized, by missing out on big gains.

These behaviors are easier to overcome if we stick to a plan. Rebalancing provides a discipline for taking such actions even when they don’t feel right.

Conversely, rebalancing also provides the justification for keeping at least a toehold in the stock market at all times. It can help you view bear markets not as cycles to be feared but as buying opportunities.

Betting on long-term averages

Still, it can be difficult emotionally to take some chips off the table during a market environment like that of the past eight-plus years, when the gains have rolled in fairly steadily. There’s a natural tendency not to want to sell winners prematurely.

However, rebalancing isn’t the same as market timing, which involves making big shifts into or out of the stock market, usually based on recent trading patterns, valuations or other news or developments. With rebalancing, the changes are more subtle, and they’re focused on getting back to a predetermined allocation or mix.

Rebalancing also involves moving among different investment subcategories. Foreign markets haven’t fared nearly as well as U.S. stocks in recent years and thus could be a good place to move some money, Fernandez noted.

Rebalancing rests on another assumption — that investment returns will tend to fluctuate more or less in line with their long-term averages. This is the concept of “reverting to the mean.” While individual stock prices can fluctuate wildly, the market as a whole has returned about 11 percent annually over time. After a big rally, stocks tend to cool off for a while. After a slump, they tend to recover. 

“A disciplined rebalancing approach continually positions our portfolios to reduce risk,” said Research Affiliates.

In fact, investors who rebalance don’t necessarily give up all that much in gains, even when the market is advancing. For example, the all-stock Standard & Poor’s 500 index generated an average gain of 7.2 percent annually over the 20 years through 2017, noted JPMorgan Asset Management. A 60 percent/40 percent stock-bond split didn’t do all that much worse, returning 6.4 percent a year, but with less risk.

Tips for success

Rebalancing is a simple concept, but there are ways to make it more effective. Here are some tips on that:

  • Rebalancing works best inside Individual Retirement Accounts, 401(k) plans and other accounts where buy/sell decisions don’t trigger taxable gains or losses. If rebalancing would exert a tax impact or result in big trading costs, you might want to rebalance less frequently.
  • You don’t need to rebalance all that often. Many advisers suggest doing so about once a year or after your portfolio has drifted out of whack by maybe five percentage points.
  • Rather than selling assets to rebalance, an alternative would be to earmark new investment dollars or reinvested dividends into stocks or bonds that have lagged.
  • Rebalancing doesn’t work as well with individual stocks or bonds, which conceivably could lose all their value. You want to use broadly diversified funds.

As noted, the flip side to rebalancing is that it can slow your gains during periods of sustained rising prices. But after more than eight years of a mostly upward trend, the odds are increasing for a major, downward shift in direction.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

READ MORE:

  • Don’t know what to do with your 401(k) plan? Consider moving it to an IRA
  • Here’s what economic growth means for your investments
  • Keys to better investing may be hiding in your tax return

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'Am I on a suckers' list after investing £1862 in carbon credits?'

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  1. ‘Am I on a suckers’ list after investing £1862 in carbon credits?’  Telegraph.co.uk
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Investing: It's not that difficult to get the big things right

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  1. Investing: It’s not that difficult to get the big things right  The Guardian
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