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Dual Impact Investing: Improve the Planet and Your Portfolio’s Potential

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This infographic is available as a poster.

Dual Impact Investing

This infographic is available as a poster.

Dual Impact Investing: Align Your Investments With Your Values

Amid the popularity of sustainable investing, a challenge has arisen. Investors are becoming more concerned about “greenwashing”, where the financial industry makes false or misleading sustainability claims. In fact, 59% of global investors cite “greenwashing” as the biggest challenge to investing sustainably. Luckily, there’s a solution: dual impact investing.

Through dual impact investing, investors are able to better understand the effect their investments are having on the world. This graphic from New York Life Investments explains what dual impact investing is and explores a few of the compelling investment themes.

What is Dual Impact Investing?

With dual impact investing, the goals are two-fold:

  • Enhance your portfolio’s potential: The fund invests in an environmental, social, or governance (ESG) theme with a growth opportunity.
  • Make a social or environmental impact: The investment manager donates a portion of their profits to a designated non-profit related to the fund’s ESG theme.

This approach aims to increase return potential, while also contributing to a more sustainable future for our world.

Compelling Themes for Investment

To see what this looks like in practice, let’s take a look at a few of the investment themes.

1. Blue Economy

The blue economy involves targeting companies that are based in, and actively good for, the ocean. For example, this can include businesses focused on:

  • Sustainable oceans
  • Cleaner shipping
  • Pollution reduction
  • Carbon efficiency
  • Clean energy

What is the opportunity?
U.S. blue economy sales growth was 5.1% from 2018-2019, more than double that of the U.S. economy overall. In addition, ocean-based exports are valued at over $2.5 trillion globally.

2. Green Transportation

Green transportation involves targeting companies that advance sustainable transportation through cleaner energy products and solutions. This can include businesses focused on:

  • Transportation equipment and services
  • Clean energy resources
  • Technology that increases transportation efficiency
  • Infrastructure components

What is the opportunity?
Global EV car sales are projected to increase more than 7.5 times from 2020 to 2030. More broadly, the global renewable energy market is projected to grow at a compound annual growth rate of 8.4% over the next decade.

3. Gender Equality

Gender equality involves targeting companies that are leading in gender equality within the workplace. For instance, this can include businesses focused on:

  • Gender balance in leadership & the workforce
  • Equal compensation & work-life balance
  • Policies promoting gender equality
  • A commitment to women’s empowerment

What is the opportunity?
Of global companies with gender diversity in management, nearly three-quarters report profit increases of 5-20%. Not only that, improving gender equality could stimulate economic growth. In a “best in region” scenario—where each country’s progress matches that of the country in its region showing the most progress towards gender parity—annual global GDP could rise by almost $12 trillion by 2025.

4. Heart Health

Heart health involves targeting companies that treat heart disease, or help people lead healthier lifestyles. This can include businesses focused on:

  • Diagnosing or treating cardiovascular disease
  • Promoting regular exercise and tracking fitness
  • Healthy food and wellness products
  • Health education through IT services

What is the opportunity?
The global cardiovascular drug market is expected to grow at a compound annual growth rate of 4% from 2020-2025. In addition, health conscious consumer-packaged goods saw impressive sales growth in 2019. For instance, fresh food sales grew by $4.6 billion.

Why Dual Impact Investing is Meaningful

By investing in these growing themes, investors have the potential to capitalize on shifting consumer sentiment and more stringent regulations.

The two-sided approach allows investors to:

  • Express their values through their investments, by accessing ESG opportunities.
  • Make a concrete impact, with contributions coming from investment manager profits—not investors’ own pockets.

Through dual impact investing, investors can improve their portfolio’s potential and the planet.

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Infographics

A Visual Guide to Navigating Down Markets

This infographic looks at the key fundamentals and market sectors that have been historically resilient during down markets.

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Down Markets

This infographic is available as a poster.

A Visual Guide to Navigating Down Markets

Today, markets are facing headwinds due to the impact of capital misallocation to overpriced securities over the last decade. High inflation and rising interest rates have highlighted this misallocation.

Amid market uncertainty, the above infographic from New York Life Investments provides investors with insights to prepare for down markets and shifting economic conditions.

Market Valuations in Context

To start, let’s look at market valuations.

Roughly a year before the market began to turn, the price-to-earnings (P/E) ratio of the S&P 500 Index reached 38 in late 2020—nearly double its 10-year average of 20.3. The P/E ratio is a common valuation measure for equities. This metric shows investors how much they would pay for $1 of earnings.

This suggests that stocks were pricier than long-term averages, hitting steep valuations unhinged from their underlying fundamentals. Ultra-low interest rates likely bolstered valuations, encouraging investors to invest their money in equities versus cash or government bonds, which were at historic lows.

 202020212022*
U.S. Interest Rate Change-250 bps0 bps225 bps
Average Annual CPI Percent Change1.2%4.7%8.6%

*Data as of Q1 2022

As interest rates increased and inflation rose higher, the P/E ratio of the S&P 500 Index fell to 20.8 in April 2022, closer to its longer-term average.

With this in mind, let’s look at the underlying fundamentals and key sectors that may position investors for strength amid a changing macroeconomic environment.

1. Focus on Fundamentals

When interest rates are rising and inflation is high, fundamentals relating to cash flow become more important:

  • Earnings Growth
  • Dividends
  • Return on Invested Capital (ROIC)
    • ROIC is a profitability measure that shows how much a company earns on its invested capital, such as debt and equity.

      Historically, improving fundamentals have been a leading indicator of sector performance over the intermediate-term. Along with this, S&P 500 Index dividends have surpassed inflation over the last two decades. In fact, between 2000 and 2021, dividends paid out increased from $140 billion to $512 billion, or about 3.7 times.

      Not only that, dividends have historically been far less volatile than stocks. Since 1957, stock prices have been more than two times as volatile as their dividend cash flows.

      2. Trouble Can Become Opportunity

      Consumer sentiment is hovering near historical lows.

      The good news is this may be a silver lining for the consumer discretionary sector, which has historically outperformed when sentiment sinks to this level.

      Consumer discretionary stocks cover non-essential items such as restaurants, hotels, and automobiles.

      Consumer Sentiment Index LevelHistorical Odds of Consumer Discretionary
      Outperformance (12-Month)
      < 55100%
      < 6574%
      < 7576%
      > 9550%

      Given historical patterns, the consumer discretionary sector may be poised to accelerate over the next 12 months.

      3. Value in Favor

      Given high inflation and interest rates on the rise, it may present an opportunity for a value investment approach.

      Value stocks are considered underpriced compared to the broader market and are often inflation-sensitive. In the last year, value stocks have outperformed growth by over 20 percentage points.

      On a sector-level, materials, financials, and communication services are valued below their average P/E ratio, along with the following sectors:

      S&P 500 SectorForward 12-Month
      P/E Ratio
      5-Year AverageYear-to-Date Earnings Growth
      Materials13.517.414.6%
      Financials12.113.3-13.7%
      Communication Services15.117.7-5.1%
      Industrials17.519.332.1%
      Real Estate19.019.113.6%

      Source: FactSet, 08/05/22

      Although the tech sector has seen declines in 2022, the sector’s P/E ratio (22.5) is above its 5-year average (21.7) with 9.8% earnings growth year-to-date.

      Market Scenarios

      With the S&P 500 Index experiencing its worst first half since 1970, let’s look at the different scenarios going forward into 2023.

      The below table shows the worst case, base case, and best case scenarios for S&P 500 Index price returns during bear markets, based on data from 1953 to 2020.

      Market ScenarioS&P 500 Index Cumulative Price Return
      During a Recession
      Year
      Worst Case< -18%2001
      Base Case16%Average
      Best Case> 44%2020

      Historical data shows that on average, the S&P 500 Index has returned 16% one year after the start of a recession.

      The following key factors will likely influence market developments:

      • Inflation
      • Consumer Spending
      • Unemployment Levels
      • Interest Rates
      • Corporate Earnings Growth

      So far, the S&P 500 Index has recovered 7% from its June lows as of early September. A similar trend is seen in the NASDAQ Composite Index—an index significantly weighted in tech stocks— which has recovered 8% over roughly the same time frame.

      Keeping a Clear Focus During Down Markets

      As investors navigate down markets, rebalancing to suit their risk profile can be an important part of the process.

      It is also important to remember that markets are cyclical. For this reason, staying invested, diversified, and disciplined are critical for keeping long-term strategic goals in mind.

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Infographics

How Experts Think About Bear Market Opportunities

We look at quotes from investing legends like Warren Buffett and Peter Bernstein to take cues on how investors should approach a down market.

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How Experts Think About Bear Market Opportunities

Today, the majority of Americans are worried a bear market is looming.

The good news: there are silver linings. Bear markets can present bargains for investors, thanks to inefficient pricing and fear in the market. Going further, many investing greats have made key investments during market downturns including:

  • Warren Buffett: Automotive sector during the 2008 Global Financial Crisis
  • Shelby Davis: Financial sector during the 1997 Asian Financial Crisis
  • Peter Bernstein: Gold during the 2000 Dot-Com Crash

In this infographic from New York Life Investments, we show four quotes on bear market opportunities and the data behind their insight.

How Experts Think About Bear Market Opportunities

When faced with the challenges of a bear market, how do experts respond?

1. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

— Warren Buffett, CEO of Berkshire Hathaway

Just like a bargain on socks may be an opportunity for buyers, a bargain on stocks is an opportunity for potential upside. In fact, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment since 1987.

Investor pessimism can be measured by a ‘bull-bear spread’. This is based on an AAII survey that measures investor expectations for the market in the next six months. It is calculated by taking the percentage of investors who are ‘bullish’ on the market minus those who are ‘bearish’.

For example, in the week of April 29, 2022:

  • Bullish: 16.4%
  • Bearish: 59.4%
  • Bull-Bear Spread: – 43

Here’s how the S&P 500 Index performed after periods of extreme investor pessimism:

DateBull-Bear SpreadS&P 500 Index
12-Month Return
10/19/1990-5426%
3/6/2009-5167%
10/5/1990-4422%
9/21/1990-4325%
11/16/1990-4321%
4/29/2022-43?
8/17/1990-4118%
1/11/2008-39-36%
3/14/2008-39-41%
8/31/1990-3823%
2/21/2003-3735%
10/16/1992-3614%
7/9/2010-3625%
9/14/1990-3521%
10/26/1990-3526%
2/20/2009-3544%
4/12/2013-3514%
12/21/1990-3417%
7/21/2006-3424%
1/25/2008-34-38%

Source: Bloomberg, 5/12/22

As the above chart shows, investor pessimism is at its highest in 20 years.

Instead of thinking of how bad the market is doing, investors may be better of thinking of the market as being significantly less expensive.

2. “History provides crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”

Shelby Davis, founder of Shelby Cullom Davis & Company

Bear markets hurt. On the bright side, they only account for 29% of the market environment, with bull markets making up the lion’s share (71%). What’s more, stocks have spent the vast majority of time at or near their all-time highs.

Market EnvironmentDescription% of Time in Market Environment
All-Time HighStock market hits all-time high35%
Bull Market DipStock market falls under 10% from all-time high33%
Bull Market CorrectionStock market falls over 10% but less than 20% from all-time high3%
Bear Market DrawdownStock market falls over 20% from peak to trough10%
Bear Market RecoveryTime it takes to reach next all-time high19%

Source: Morningstar Direct, PerformanceAnalytics, UBS 4/30/2022. Based on monthly returns from 1945.

Overall, stocks have spent around two-thirds of the time at or near all-time highs.

3. “The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”

— Peter Bernstein, economist and financial historian

To avoid falling for the behavioral pitfalls of a market cycle, investors can identify key macro indicators of each stage. Below, we show the economic indicators and how they associate with each type of market cycle.

Market CycleMonetary Policy Shock*Consumer SentimentEmploymentSalesPurchasing Managers Index (PMI)
BullPositivePositivePositiveHighly PositiveHighly
Positive
CorrectionPositiveNegativePositiveNegativeNegative
BearPositiveHighly
Negative
Highly NegativeHighly NegativeHighly
Negative
ReboundHighly
Negative
PositiveNegativeNegativeNegative

Source: Goulding, L. et al., May 2022. *Represents an unexpected move in monetary policy.

As the above table shows, bear markets are associated with low consumer sentiment, high unemployment, low corporate sales, and weak manufacturing performance—with a high number of macroeconomic shocks.

4. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

— Winston Churchill, former Prime Minister of Britain

Just like bear markets can stoke investor uncertainty, rising interest rates can cause stock market disruption. However, since 1954 the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles.

Fed Rate Hike CycleS&P 500 Index Annualized Total Return
Aug 1954 - Oct 195714%
Jun 1958 - Nov 195924%
Aug 1961 - Nov 19667%
Aug 1967 - Aug 19694%
Mar 1972 - Jul 1974-9%
Feb 1977 - Jun 198111%
Mar 1983 - Aug 198413%
Jan 1987 - May 198916%
Feb 1994 - Feb 19954%
Jun 1999 - May 200010%
Jun 2004 - Jun 20068%
Dec 2015 - Dec 20188%

Source: Morningstar, Haver Analytics, March 2022

Not only that, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates. Despite the short-term impact to the market, stocks often weather the storm.

Finding Bright Spots

In summary, it is helpful to remember the following historical characteristics of a bear market:

  • Extreme pessimism
  • Short-lived
  • Higher macroeconomic shocks (employment, sales, PMI)

Investors can find opportunities by considering a contrarian point of view and learning from the time-tested experience of investing legends.

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