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The Rise of the Values-Driven Investor

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The Rise of the Values-Driven Investor

This infographic is available as a poster.

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

5 Key Questions Investors Have About Inflationary Environments

This infographic explores questions on today’s inflationary environment as the economy faces persistent price pressures.

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Inflationary Environment

This infographic is available as a poster.

5 Key Questions on Inflationary Environments

What does a changing inflationary environment mean for financial markets, and how could this impact investors?

While there are no clear answers, the above infographic from New York Life Investments looks at key questions on inflation and the potential implications looking ahead.

1. What Are the Main Factors Driving Inflation?

Often, investors closely watch core inflation since it doesn’t factor in volatile energy and food prices. In September, core inflation rose 0.6% from the previous month while headline inflation, as represented by the Consumer Price Index, increased 0.4%.

DateCore InflationHeadline Inflation
Sep 20220.6%0.4%
Aug 20220.6%0.1%
Jul 20220.3%0.0%
Jun 20220.7%1.3%
May 20220.6%1.0%
Apr 20220.6%0.3%
Mar 20220.3%1.2%

Source: Bureau of Labor Statistics, 10/13/22.

Earlier in the pandemic, surging second-hand car prices and supply-chain distortions were factors driving up inflation. But as dynamics have shifted, rising services costs, including housing, have played a significant role.

Along with these factors, a strong labor market is adding to price pressures. Nominal wages increased 6.3% annually in September, after hitting almost 7% in August, the highest in 20 years.

For this trend to reverse, unemployment levels may need to rise and interest rates may need to increase to cool an overheating economy.

2. What is the Effect of Fiscal Stimulus on Inflation?

In response to a historic crisis, the U.S. government allocated over $5 trillion in fiscal stimulus. The Federal Reserve released research that suggests that the fiscal stimulus contributed to 2.5 percentage points in excess U.S. inflation.

Specifically, the fiscal stimulus affected supply and demand dynamics, stimulating the consumption of goods. At the same time, the production of goods didn’t increase, which elevated demand pressures and price tensions.

As the short-term implications begin to unfold, the longer-term structural effects of record stimulus remain far from clear.

3. How Do Interest Rates Impact Inflation?

When inflation is running high, the Fed often hikes interest rates to cool an overheating economy.

Consider how in February 1975 there was a 17% difference between core inflation and real interest rates, an instance when the Fed got “behind the curve”. This shows that the real rate is far below the core inflation rate.

Sometimes, this prompts the Fed to raise rates to combat inflation. After several rate hikes, inflation fell to 4% by 1983, bringing the real rate and core inflation closer together. The table below shows when this gap rose to the double-digits between 1974 and early 2022:

DateCore InflationReal RateDifference
Oct 197410.6%-0.5%11.1%
Nov 197411.0%-1.5%12.5%
Dec 197411.3%-2.8%14.1%
Jan 107511.5%-4.4%15.9%
Feb 197511.9%-5.6%17.5%
Mar 197511.3%-5.8%17.1%
Apr 197511.3%-5.8%17.1%
May 197510.3%-5.1%15.4%
Jun 19759.8%-4.3%14.1%
Jul 19759.1%-3.0%12.1%
Jan 198012.0%1.9%10.2%
May 198013.1%-2.2%15.3%
Jun 198013.6%-4.1%17.7%
Jul 198012.4%-3.4%15.8%
Aug 198011.8%-2.2%14.0%
Sep 198012.0%-1.1%13.1%
Oct 198012.2%0.7%11.6%
Dec 20215.5%-5.4%10.9%
Jan 20226.0%-6.0%12.0%

Source: Peterson Institute for International Economics, Federal Reserve Bank of St. Louis, 03/14/22. The real policy interest rate is the Federal Funds Rate minus Core Inflation over 12 months.

In January 2022, this gap reached 12%, hinting towards further interest rate action from the Fed.

Over the last 11 tightening cycles since 1965, six resulted in soft landings and three resulted in hard landings. Whether or not the recent tightening cycle will result in a hard landing, also known as a significant decline in real GDP, remains an open question.

4. How Long Will Inflation Last?

From the vantage point of 2022, the direction of inflation is as complex as it is uncertain. Below, we show where inflation may be headed in the near future based on analysis from the Federal Reserve.

 2022P2023P2024P
PCE Inflation5.4%2.8%2.3%
Federal Funds Rate4.4%4.6%3.9%

Source: Federal Reserve Board, 09/21/22. Reflects median projections for PCE Inflation and the Federal Funds Rate.

By 2024, inflation is expected to fall closer to the 2.0% target amid higher interest rates. What other key factors could influence inflation going forward?

 2023 Projection
U.S. Real GDP Growth1.2%
Interest Rates4.6%
Housing Price Growth-10.0%
Unemployment Rate4.4%

Source: Federal Reserve Board 09/21/22, Morningstar, 08/07/22. Interest rates represented by the Federal Funds Rate. Housing Price Growth represented by median U.S. home prices.

A combination of slowing GDP growth, higher interest rates, decreasing housing prices, and higher unemployment could potentially dampen inflation leading into 2023.

5. What May Lessen the Impact of Inflation On My Portfolio?

During inflationary periods, value stocks have tended to perform well, based on data from Robert Shiller and Kenneth French. In fact, value stocks saw nearly 8% annualized outperformance over growth during the 1970s and over 5% outperformance during the 1980s.

Similarly, tangible assets like commodities and real estate have tended to weather these periods thanks to their ability to increase portfolio diversification and stability across economic cycles. For instance, between 1973 and 2021, commodities have averaged 19.1% during inflationary periods while real estate assets averaged 5.0%.

The Big Canvas

Generally speaking, periods of high inflation over history are quite rare. Since 1947, the average U.S. inflation rate has been 3.4%.

Inflation (1947-2021)Percentage of Time Spent
Below 0%16%
Between 0 and 5%57%
Between 5 and 10%20%
Above 10%7%

Source: CFA Institute, 07/19/21.

Against a changing environment, investors may consider balancing their portfolios with more defensive strategies that have been historically more resistant to inflation.

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Infographics

A Visual Guide to Stagflation, Inflation, and Deflation

In this infographic, we show the key differences between stagflation, inflation, and deflation and how they impact the economy and investors.

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A Visual Guide to Stagflation, Inflation, and Deflation

Today, high inflation and slowing economic growth have contributed to stagflation worries.

As of August 2022, the U.S. inflation rate has risen to 8.3%, above the central bank target of 2%. Yet unlike the last period of stagflation in the 1970s, unemployment—a key ingredient for stagflation—remains low.

In this infographic from New York Life Investments, we show the key differences between stagflation, inflation, and deflation along with the broader economic implications of each.

Main Features of Inflationary Environments

What are the main characteristics of each inflationary scenario?

 Economic GrowthInflationUnemployment
StagflationSlowsIncreasesIncreases
InflationIncreasesIncreasesDecreases
DeflationSlowsDecreasesIncreases

The key markers of stagflation are weak growth, persistent inflation, and structural unemployment—meaning that high unemployment levels continue beyond a recession.

In a stagflationary scenario, inflation expectations continue to rise each year. This can happen when inflation stays too high for too long, enough for expectations to shift across the economy. This was the case in the U.S. in the 1970s, until the Federal Reserve fought inflation with steep interest rate hikes.

Here’s a closer look at some of the main causes of each scenario and how they’ve historically impacted households and businesses.

1. Stagflation

The term stagflation is the combination of ‘stagnation’ and ‘inflation’.

The primary causes include the expansion of the money supply feeding into higher inflation, as well as supply shocks, which can drag on economic growth.

During periods of stagflation, consumers spend more on items such as food and clothing, while earning less—reducing their purchasing power. Less purchasing power can eventually cause people to buy less, leading to falling corporate revenues, which can ripple across the economy.

Case Study: 1970s Stagflation

The stagflation of the 1970s saw inflation, as measured by the Consumer Price Index, increase from 1% to 14% between 1964 and 1980.

Price pressures, driven by skyrocketing energy prices in the 1970s, contributed to a sharp economic downturn. By 1980, unemployment reached 7.2%.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
19641.3%5.0%5.8%
198013.5%7.2%-0.3%

In response, the Federal Reserve raised interest rates as high as 20% in 1981. Soon after, inflation sank to 5% by 1982 and unemployment levels improved.

2. Inflation

Inflation is the rise in the price of goods and services across the economy. Broadly speaking, low and stable inflation is associated with periods of economic growth and low unemployment. It can be driven by rising consumer demand.

The expectation of predictable inflation allows consumers and businesses to prepare for the future, in terms of both their purchases and investments.

Case Study: 1990s-2000s

Over the 1990s and 2000s, the U.S. saw relatively low and stable inflation.

Rapid global population growth, the absence of oil shocks, and expanding global trade contributed to falling costs across industries. Between 1990 and 2007, inflation averaged 2.1% compared to 8.0% during the 1970s as price pressures became less volatile.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
19905.4%6.3%1.9%
20072.9%5.0%2.0%

Today, several central banks adhere to a 2% inflation target to ensure prices remain stable and predictable.

3. Deflation

Deflation is the fall in prices of goods and services in the economy.

In many cases, its main causes are demand shortfalls, reduced output, or an excess of supply. For households, spending may stall as consumers wait for prices to fall. In turn, declining prices may lead to a lag in growth for businesses.

Sometimes, deflationary periods raise concerns of slower economic growth. However, supply-driven deflationary periods may be associated with lower prices, raising real incomes and boosting output as exports become more competitive.

Case Study: 1930s Great Depression

Prior to WWII, deflationary episodes were more common than today. One prime example is the Great Depression of the 1930s, when real GDP fell 30% between 1929 and 1933 and unemployment spiked to 25%.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
1930-2.7%8.7%-8.5%
1933-5.2%24.9%-1.2%

Tightening monetary policy contributed to this environment. In fact, between 1930 and 1933, the U.S. money supply contracted roughly 30%, while average prices fell by a similar amount.

Historical Asset Class Performance

Which asset classes have historically tended to perform well across different types of inflationary environments?

Average Real Annual Total Returns
(1973-2021)
GoldilocksDisinflationReflationStagflation
U.S. Equities16.1%8.4%14.6%-1.5%
U.S. Treasuries4.3%8.1%-2.0%0.6%
U.S. T-Bills0.8%1.7%0.0%0.4%
Commodities0.4%-5.6%21.0%15.0%
Gold-2.5%1.3%-1.1%22.1%
REITs18.1%3.5%14.0%6.5%

Defensive assets like gold and commodities have historically performed well during stagflationary periods, with average returns of 22.1% and 15.0%, respectively.

Meanwhile, U.S. equities have typically performed well during moderate inflation, or ‘goldilocks’ environments, characterized by falling inflation and rising economic growth.

Both U.S. equities and Treasuries have shown the strongest real returns in deflationary or ‘disinflationary’ periods of slowing growth and inflation, at over 8% returns on average each.

Understanding Different Inflationary Environments

Today’s inflationary period is jarring for investors after an extended period of low and stable inflation. With this in mind, the economy has historically cycled through different types of inflationary periods.

While central banks aim to influence price stability and employment through monetary policy, investors can influence their portfolio by adjusting their asset allocation based on where the inflationary environment may be heading.

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