Connect with us

Infographics

Sustainable Investing: Debunking 5 Common Myths

Published

on

This infographic is available as a poster.

Sustainable Investing Infographic

sustainable investing

This infographic is available as a poster.

Sustainable Investing: Debunking 5 Common Myths

It began as a niche desire. Originally, sustainable investing was confined to a subset of investors who wanted their investments to match their values. In recent years, the strategy has grown dramatically: sustainable assets totaled $12 trillion in 2018.

This represents a 38% increase over 2016, with many investors now considering environmental, social, and governance (ESG) factors alongside traditional financial analysis.

Despite the strategy’s growth, lingering misconceptions remain. In today’s infographic from New York Life Investments, we address the five key myths of sustainable investing and shine a light on the realities.

1. Performance

MythReality
Sustainable strategies underperform conventional strategiesSustainable strategies historically match or outperform conventional strategies

In 2015, academics analyzed more than 2,000 studies—and found that in roughly 90% of the studies, companies with strong ESG profiles had equal or better financial performance than their non-ESG counterparts.

A recent ranking of the 100 most sustainable corporations found similar results. Between February 2005 and August 2018, the Global 100 Index made a net investment return of 127.35%, compared to 118.27% for the MSCI All Country World Index (ACWI).

The Global 100 companies show that doing what is good for the world can also be good for financial performance.

Toby Heaps, CEO of Corporate Knights

2. Approach

MythReality
Sustainable investing only involves screening out “sin” stocksPositive approaches that integrate sustainability factors are gaining traction

In modern investing, exclusionary or “screens-based” approaches do play a large role—and tend to avoid stocks or bonds of companies in the following “sin” categories:

  • Alcohol
  • Tobacco
  • Firearms
  • Casinos

However, investment managers are increasingly taking an inclusive approach to sustainability, integrating ESG factors throughout the investment process. ESG integration strategies now total $17.5 trillion in global assets, a 69% increase over the past two years.

3. Longevity

MythReality
Sustainable investing is a passing fadSustainable investing has been around for decades and continues to grow

Over the past decade, sustainable strategies have shown both strong AUM growth and positive asset flows. ESG funds attracted record net flows of nearly $5.5 billion in 2018 despite unfavorable market conditions, and continue to demonstrate strong growth in 2019.

Not only that, the number of sustainable offerings has increased as well. In 2018, Morningstar recognized 351 sustainable funds—a 50% increase over the prior year.

4. Interest

MythReality
Interest in sustainable investing is mostly confined to millennials and womenThere is widespread interest in sustainable strategies, with institutional investors leading the way

Millennials are more likely to factor in sustainability concerns than previous generations. However, institutional investors have adopted sustainable investments more than any other group—accounting for nearly 75% of the managed assets that follow an ESG approach.

In addition, over half of surveyed consumers are “values-driven”, having taken one or more of the following actions with sustainability in mind:

  • Boycotted a brand
  • Sold shares of a company
  • Changed the types of products they used

Women and men are almost equally likely to be motivated by sustainable values, and half of “values-driven” consumers are open to ESG investing.

5. Asset Classes

MythReality
Sustainable investing only works for equitiesSustainable strategies are offered across asset classes

This myth has a basis in history, but other asset classes are increasingly incorporating ESG analysis. For instance, 36% of today’s sustainable investments are in fixed income.

While the number of sustainable equity investments remained unchanged from 2017-2018, fixed-income and alternative assets showed remarkable growth over the same period.

Tapping into the Potential of Sustainable Investing

It’s clear that sustainable investing is not just a buzzword. Instead, this strategy is integral to many portfolios.

By staying informed, advisors and individual investors can take advantage of this growing strategy—and improve both their impact and return potential.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Infographics

What is Defined Outcome Investing?

Defined outcome investing is a customizable solution that investors of all mindsets can use to add a layer of predictability to their results.

Published

on

This infographic is available as a poster.

What is Defined Outcome Investing?

Equities can play a critical role in any investment portfolio thanks to their long-term growth potential. At the same time, this asset class can also present a number of challenges for investors.

Uncertainty around the short to mid-term performance of equities can be a major deterrent for some, while others may find it difficult to select the best stocks based on their unique needs. Fortunately, there is a solution that can help investors overcome these challenges. In today’s infographic from New York Life Investments, we introduce defined outcome investing, and examine how it can help individuals take more control over their equity investments.

Understanding How DOI Works

Defined outcome investing (DOI) is a family of strategies that add a layer of predictability to an investor’s results. This is achieved through two unique aspects.

The first is a customizable risk-return profile, which gives investors the option of receiving either upside enhancement or downside protection features.

Risk-Return FeatureHow it Works
Upside enhancementEnhances the returns of the specified index, up to a cap. The investor is not sheltered from negative returns.
Downside protectionProtects investors from negative returns, up to a certain amount. The investor still participates in market upside, up to a cap.

The second aspect is a predetermined time period—defined outcome strategies carry a maturity date, similar to a fixed income security. Upon reaching its maturity date, a defined outcome strategy expires and the proceeds are paid out to the investor. This feature makes it easier for an investor to time their equity exposures around personal liquidity needs.

To understand the potential of DOI, consider a woman who wishes to make a down payment on a property one year from now. She would like to invest and grow her money in the meantime, but is worried about market volatility. Rather than purchase individual securities or ETFs, she could opt for a defined outcome strategy with downside protection over a one year term.

These features would reduce the likelihood of negative returns over the year, while still giving her exposure to the growth potential of equities.

Types of Defined Outcome Strategies

Investors have three distinct types of defined outcome strategies to choose from, depending on their personal objectives.

Growth Strategies

Growth strategies are designed for investors who:

  • Have a positive outlook on markets
  • Seek high levels of capital appreciation
  • Accept the possibility of negative returns

As implied by their name, these strategies produce enhanced market returns. They do not, however, offer any downside protection. The table below demonstrates how a growth strategy with 50% upside enhancement would perform across a number of scenarios. Assume a maximum return cap of 36%.

Market ScenarioS&P 500 Return (via ETF)Growth Strategy Return Defined Outcome Result
Strongly Positive50%36%Investors reach their maximum return cap of 36%.
Positive20%30%Investors gain 10 percentage points over the index.
Modestly Positive8%12%Investors gain 4 percentage points over the index.
Negative-10%-10%Investors match the index's negative return.

Buffered Strategies

Buffered strategies are a more neutral solution designed for investors who:

  • Have a moderate outlook on markets
  • Seek capital appreciation
  • Require a safety buffer to mitigate losses

Buffered strategies allow investors to participate in equity markets while receiving a specified level of insulation from negative returns. The table below demonstrates how a buffered strategy with 20% loss insulation would perform across a number of scenarios. Assume a maximum return cap of 24%.

Market ScenarioS&P 500 Return (via ETF)Buffered Strategy ReturnDefined Outcome Result
Strongly Positive30%24%Investors reach their maximum return cap of 24%.
Positive8%8%Investors match the positive return of the index.
Negative-20%0%Investors are sheltered from losses within their buffer.
Strongly Negative-30%-10%Any losses beyond the buffer are realized by the investor.

Preservation Strategies

Preservation strategies are best suited for risk-averse investors who:

  • Have a negative outlook on markets
  • Want to manage downside risk
  • Have significant financial obligations in the near future

Preservation strategies provide a different type of downside protection where, instead of a buffer, investors define their maximum loss. The table below demonstrates how a preservation strategy with 95% capital preservation (5% maximum loss) would perform across a number of scenarios. Assume a maximum return cap of 20%.

Market Scenario S&P 500 Return (via ETF)Preservation StrategyDefined Outcome Result
Strongly Positive30%20%Investors reach their maximum return cap of 20%.
Positive8%8%Investors match the positive return of the index.
Negative-3%-3%Investors match negative returns within their maximum loss.
Strongly Negative-30%-5%Investors maintain 95% of their capital.

Accessing Defined Outcome Strategies

Defined outcome strategies are accessed through a vehicle known as a unit investment trust (UIT). UIT’s offer similar levels of transparency and accessibility when compared to ETFs or mutual funds, including daily liquidity and transparency of holdings. So how are they able to offer such compelling risk-return features?

The answer lies in their use of equity options, a type of derivative contract. Equity options give the holder, in this case the UIT, the option of buying (or selling) a stock at a predetermined price on a specific date in the future. These contracts are used to engineer the risk-return features previously described, and are the reason why defined outcome strategies carry a maturity date.

Thus, in order to realize the specified upside enhancement or downside protection features, an investor must hold the UIT for its entire term. While there is no penalty for redeeming a UIT early, the investor will not reach their defined outcome objective.

A More Predictable Approach to Investing

Equities are a powerful tool for long-term growth, but it can be difficult to build a properly-aligned portfolio according to one’s risk tolerance. This becomes especially relevant in today’s uncertain economic environment.

With customizable risk-return profiles and a defined maturity date, defined outcome investing is a powerful solution that can support a variety of financial goals through different phases of the market cycle. Whether its maximizing returns or saving for retirement, investors can now take greater control over their financial future.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Infographics

Financial Wellness: How to Be Resilient During a Crisis

Even prior to COVID-19, only about 28% of U.S. adults were financially healthy. Here’s how you can improve your financial wellness during a crisis.

Published

on

financial wellness during crisis

This infographic is available as a poster.

Financial Wellness: How to Be Resilient During a Crisis

Due to the COVID-19 pandemic, 90% of Americans feel anxious about money. These stress levels are the same across all income groups.

Unfortunately, financially-stressed people are more likely to face physical and mental health challenges. For example, people with high debt stress during the 2008 financial crisis had higher levels of back tension, severe depression, and anxiety.

In today’s infographic from New York Life Investments, we take a look at the current state of financial health, and highlight ways people can improve their financial wellness during a crisis.

A Current Snapshot

Financial health is the degree to which people are able to be resilient and take advantage of opportunities over time. It rests on eight indicators:

  • Spend: Spend less than income and pay bills on time
  • Save: Have sufficient liquid savings and long-term savings
  • Borrow: Have manageable debt and a prime credit score
  • Plan: Have appropriate insurance and plan ahead financially

Based on these factors, individuals fall along a spectrum of financial health. In the U.S., only about 28% of people were considered to be financially healthy in a 2019 study.

Clearly, many Americans were already facing challenging circumstances prior to the pandemic. Here are a couple of the top issues.

More Complexity

Finances have become more complicated over time.

For many years, workers could rely on defined benefit pension plans that paid a set amount in retirement. In recent decades, pensions have primarily shifted to defined contribution plans. These require the employee to make investment decisions and build their own nest egg.

Unfortunately, financial education has not kept pace with the rising need for knowledge. Fewer than half of U.S. states require high school students to take a course in personal finance.

“Money Talk” Taboo

To build financial literacy, individuals would benefit from talking more openly about money. However, 44% of Americans surveyed would rather talk about religion, death, or politics than discuss personal finance with a loved one.

Fears of embarrassment and conflict are major emotional roadblocks that hamper financial progress. What can individuals do to improve their financial wellness, especially during a crisis?

Building Resiliency

People can follow a step-by-step strategy to optimize their financial situation.

  1. Assess their current situation.

    Uncertainty can be a major source of anxiety. To identify the source of stress—and determine if it’s warranted—investors can take stock of their income, expenses, savings, and debts.

    Financial self-awareness is positively associated with greater financial satisfaction, and stronger spending and investing decisions.

  2. Prepare for the worst-case scenario.

    What can individuals do if they lose their job or see a prolonged drop in retirement savings?

    Investors can consider various options, such as taking on freelance work, cutting unnecessary expenses, or increasing retirement plan contributions. Then, they can “stress test” their financial plan to account for these scenarios and begin preparing as best they can.

  3. Break goals into small chunks.

    Specific, achievable, and measurable goals are easier to manage. For example, rather than having a goal to pay down $51,000 in debt, an individual could aim to make monthly payments of $850 over five years.

    By setting smaller goals, investors can take action to make progress. Research has shown that achieving quick wins makes people more likely to achieve their financial goals.

  4. Improve financial knowledge and openness.

    Investors can educate themselves as much as possible—people with high investment knowledge are proven to be more prepared and less anxious.

     Has planned for retirementFeels anxious when thinking about personal financesHas emergency savings
    Low Investment Knowledge62%48%78%
    High Investment Knowledge73%21%90%

    People can also take steps to break financial taboos with loved ones, by starting with simple conversations about experience and building to more concrete discussions about family finances. The ability to talk about money is one of the most important skills for building financial literacy.

  5. Create long-term, purposeful goals.

    Setting the right goals helps investors define their own parameters for success, which in turn keeps them focused and motivated. It’s also important to monitor goal progress regularly, to allow for portfolio or contribution adjustments as needed.

Taking Charge

Financial crises can strike at any point in time, whether it’s due to personal circumstances or an economic downturn.

To improve their situation, people can focus on the controllable elements of financial health: spending, saving, borrowing, and planning. This allows investors to emerge with a stronger, more resilient plan than they had before the crisis.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
New York Life Investments Company Spotlight

Subscribe

Are you a financial advisor?

Subscribe here to get every update, including when new charts or infographics go live:

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular