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The Rise of the Values-Driven Investor

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The Rise of the Values-Driven Investor

The Rise of the Values-Driven Investor

Many consumers today are considered to be “values-driven”, meaning they consider a company’s stance on environmental and social issues before making a purchase.

Such individuals will research a company’s reputation, boycott brands that are not aligned with their beliefs, and avoid products that negatively impact the environment. These types of concerns, however, aren’t just influencing the things people buy—they’re also changing the way people invest.

In this infographic from New York Life Investments, we profile the values-driven investor and examine the different ways their concerns can be incorporated into an investment portfolio.

What is a Values-Driven Investor?

Values-driven investors seek to align their portfolios with their personal beliefs and create a positive impact for society. Because of these goals, they are naturally driven to consider environmental, social, and governance (ESG) factors when selecting investments.

One common misconception is that this type of investing is only for millennials, but survey data proves this is far from the truth.

Age Group
% Interested in ESG Investing
24-3991%
40-5484%
55+80%

Source: New York Life Investments

Although ESG investing is the most popular amongst younger investors, older investors are not far behind, with 80% of correspondents aged 55+ demonstrating interest. This interest also extends across wealth brackets, as shown in the table below.

Personal Assets% Aware of ESG Investing% Likely to Invest in an ESG Fund, if Aware
$100K-$150K41%43%
$150K-$250K43%40%
$250K-$500K31%41%
$500K-$1MM34%37%
$1M+42%29%

Source: New York Life Investments

It’s clear that ESG investing has captured the attention of a very diverse group of people, but what kinds of issues do these values-driven investors actually care about?

ESG Priorities by Age Group

Values-driven investors are likely to prioritize issues differently depending on their age. For individuals between the ages of 25 and 39, longer-term issues such as global warming receive the highest concern. This is likely due to younger investors having more years ahead of them, and thus a greater chance of exposure to the effects of climate-related issues.

Below is a breakdown of each age group’s ESG priorities.

IssueAges 25 - 39Ages 40 - 54Age 55+ 
Global warming34%34%27%
Impact of plastic on the oceans21%30%26%
Sustainability24%23%17%
Data fraud or theft14%20%29%
Gun control13%20%22%

Source: New York Life Investments

For investors with a shorter time horizon to retirement, immediate concerns take the highest priority. For example, 29% of investors aged 55 and over were concerned with data fraud or theft, compared to just 14% among those aged 25 to 39.

How Can a Portfolio Reflect These Concerns?

Values-based investors have two primary approaches to choose from when building a portfolio tailored to their beliefs.

Approach #1: ESG Exclusionary

The first approach is ESG exclusionary investing, also known as “negative screening”. This method is well-suited for investors who want their portfolios to be completely aligned with their beliefs and values.

It involves the reduction, or avoidance, of exposure to specific industries that go against one’s values. Industries that are commonly screened out include tobacco, gambling, alcohol, and fossil fuels, the latter of which has gained significant attention in recent years.

Commonly referred to as “fossil fuel divestment”, this type of exclusionary approach focuses on freezing new investments in the sector while gradually removing existing portfolio exposure. Today, over 1,200 institutional investors representing $14.6T in assets have pledged their commitments to going fossil fuel free.

Institution TypeBreakdown of Total Assets Pledged
Faith-based organization32%
Educational institution15%
Philanthropic foundation15%
For profit corporation13%
Government13%
Pension fund13%
Non-governmental organization (NGO)4%
Healthcare institution1%

Source: Fossil Free (a project of 350.org)

Approach #2: ESG Inclusionary

The second approach is ESG inclusionary, also known as “positive screening”. This method is for investors who believe that companies with strong sustainability practices can outperform over the long term.

Instead of avoiding specific industries, an ESG inclusionary approach seeks to identify the best companies in any given industry. In practice, this involves the analysis of both traditional financial metrics and ESG factors.

Examples of Traditional Financial AnalysisExamples of ESG Factor Analysis
Analyze the company’s financial statementsExamine the company’s waste management practices
Study historical market trendsMonitor the company’s employee relations
Consider the direction of the broader economyGrade the company’s transparency & disclosure

Research on the effectiveness of ESG factor analysis has been overwhelmingly positive, and is a likely reason for the robust growth these types of strategies have seen in recent years. In fact, ESG leaders (companies with strong ESG practices) even outperformed their respective indices during the COVID-19 selloff in Q1 2020.

Building a Well-Aligned Portfolio

Despite several myths surrounding sustainable investment, there is an incredibly diverse group of individuals who want their portfolios to reflect their personal beliefs.

The typical values-driven investor is 48 years old, which means they’re likely in their peak earning years and are able to make larger portfolio contributions. Thus, this growing demographic is one that the investment industry should not ignore.

The types of issues these investors care about, however, can vary depending on age and other metrics. Thus, it’s important for them to learn about the different investment approaches available. Armed with this knowledge, investors can take better control of their finances and feel more confident in their decisions.

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Infographics

Paradigm Shift: The Rise of Women’s Earning Power

As women’s earning power continues to grow, wealth managers who cultivate a deeper understanding of these clients will ultimately stand out from the rest.

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Paradigm Shift: The Rise of Women’s Earning Power

In 2019, women owned almost 33% of global wealth.

Looking at North America alone, women control $35 trillion in assets. These assets are set to grow by a 6.9% compound annual growth rate (CAGR) until 2023, after COVID-19 effects are accounted for. Notably, the acceleration of female breadwinners is amplifying this trend.

The above infographic from New York Life Investments examines four archetypes of female breadwinners, highlighting their household dynamic and financial priorities as the wealth landscape continues to shift.

A Room of One’s Own

Today, one segment of women makes up nearly 25% of households with over $250K of investable assets: female married breadwinners.

They remain a blind spot across the wealth management profession, but provide a vital opportunity for wealth management professionals.

From a high-level perspective, these primary earners describe themselves as independent and hard working, according to a study by RTi Research. While 75% work with an advisor, only 41% feel knowledgeable about their finances. At the same time, 82% of the primary earners are college graduates, while advancing their financial education remains a priority.

Below is a deep dive on the spectrum of female married breadwinner households, outlining their key mindsets, behaviors, and outlooks.

The Four Archetypes

Female breadwinner households can be broken down into four broad archetypes.

1. We’re In This Together

Accounting for 39% of respondent households, this archetype reflects a collaborative dynamic where both partners appreciate each other and are aligned on future financial objectives.

Household Dynamic

  1. Works as a team with their partner
  2. Partners are proud and appreciative of one other
  3. Typically have a positive outlook

Defining Opinions and Behaviors

  • My spouse supports me: 80%
  • My spouse appreciates my hard work: 74%
  • We are aligned on future financial goals: 66%
  • We live in a “normal” household: 59%

2. I Got It

This archetype comprised 25% of respondents. Typically, the primary earner illustrated pride and enjoyment in this role. At the same time, they felt supported by their partners.

Household Dynamic

  1. Comfortable and experienced in this position
  2. Spouse is supportive and comfortable with a secondary role

Defining Opinions and Behaviors

  • Primary earner role is a source of pride: 43%
  • Primary earner role is fulfilling: 41%
  • As the primary earner I am in control: 33%
  • Always been the primary earner: 61%

3. A Little Help Please

With 26% of respondents, this archetype was an outlier, mainly as they did not feel a positive impact from being a breadwinner. These women carry a larger burden on their shoulders and would prefer if their partner would take on more household tasks.

Household Dynamic

  1. Feel that everything relies on them, want their partner to contribute more
  2. Would even prefer if roles were reversed

Defining Opinions and Behavior

  • Everything depends on me: 42%
  • Want spouse to take on more responsibilities: 29%
  • Negative impact as primary breadwinner: 97%
  • Prefer if spouse was the primary earner: 59%

4. I’ve Got It From Here

This final archetype accounted for 33% of households. These were characterized by the women taking on a primary earner role later in life, while feeling proud in the role as the highest earner.

Household Dynamic

  1. Typically new to primary earner role
  2. Feels supported by their spouse, and long-term financial goals are aligned
  3. Appreciates the hard work partner has done in the past

Defining Opinions and Behaviors

  • My spouse supports me: 59%
  • My spouse appreciates my hard work: 51%
  • Became primary earner later in life: 100%
  • Feels strong: 52%

Getting a better sense of these archetypes can help advisors personalize their approaches—and harness a clearer appreciation of their clients financial goals.

On the Horizon

Of course, female married breadwinners have a diverse range of financial goals. These investment goals and objectives typically vary across different life stages, but they also share many similarities.

For primary earners 60 and over, the most important investment goals were a comfortable lifestyle and protecting their future. On the other hand, breadwinners between the ages of 40-59 were most concerned with saving for retirement. Finally, the key investment goals of those aged 25-39 also surrounded a comfortable lifestyle, saving for children’s education, and saving for retirement.

As women amass greater wealth at faster speeds, understanding how to manage it well becomes increasingly crucial.

A New Wealth Frontier

It comes as no surprise that the primary female earners who work with advisors have better views on their finances.

As a result, opportunity knocks. Half of female breadwinners see their financial advisor as a business partner, and 33% see them as a necessity. At the same time, 66% of female primary earners want an advisor that will make them the most money.

As this powerful economic force continues to accelerate, it could create a watershed decade ahead for both women’s wealth and the wealth management field.

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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.

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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.

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