The alternatives industry has a duty to not only defy gravity and deliver strong returns, but to do so in a way that can genuinely change the world for the better, inspiring the next generation of star managers and investors.
Cognisant of its importance, CAIS 2017 focused on philanthropy and impact investing and emerged as key themes among panellists. It demonstrated a collective vision of responsible investing in new technologies and energy initiatives, to make the world a better place. And a commitment to philanthropic endeavours to bring people out of poverty, not just in the developing world, but first world countries including the US.
One fascinating panel session, entitled The Birth of Stars, was chaired by Lord Michael Hastings CBE, Global Head of Corporate Citizenship, KPMG. On the panel, Andrea Jung, President & CEO, Grameen America, Inc and former Chairperson and CEO of Avon Products Inc, spoke about the Grameen social finance model and the impact this was having on women across the US.
"Womens' entrepreneurial businesses are growing at 1.5 times the US national average, while women of colour are starting businesses three times faster. I fundamentally believe that one of the biggest ways to deal with our income inequality gap is to invest in people. Give them the opportunity to become the economic engines of change in our own backyard because the impact to society will result in the resumption of growth in America," said Jung.
An estimated 43 million Americans live in poverty. To address this, giving people a hand up, as opposed to a hand out, by way of an investment – in this case USD1,500 microfinance loans – is, in Jung's view, one of the most pragmatic ways to address poverty. Grameen does more than merely provide loans to women. It offers training and education to help individuals understand the impact of building credit and saving, with groups of up to 30 female entrepreneurs meeting every week to support and share ideas with one another.
"Peer mentorship is probably one of the biggest pieces of alchemy in all of this. Our loan repayment rate is high and we help people to improve their credit score," added Jung, confirming that as a social business, all the profits go back into expanding the programme. "Grameen has community benefit at the heart of its social business model," she said.
Philanthropic programmes have the power to transform societies and make meaningful differences to people's lives. ELMA Philanthropies Services is the services arm of The ELMA Group of Foundations, which provides philanthropic assistance to high-impact initiatives within each foundation's area of focus including healthcare, education and a vaccines and immunisation foundation.
Tom McPartland, Chief Executive Officer, ELMA Philanthropies Services, said that developing partnerships with the likes of the Vodafone Foundation had provided an avenue into numerous interesting areas and led to a joint initiative programme.
"We each put up USD25 million and each went out to get an additional USD50 million to bring USD100 million to bear on three or four key thematics, such as HIV prevention programmes in places such as Lesotho. This partnership has really moved the needle in a way we didn't think possible," commented McPartland.
Critical to the success of changing the world is inspiring the next generation of philanthropists. One of the most successful world movements has been developed by Craig and Marc Kielburger, brothers and co-founders of the WE Movement, which includes WE Charity, ME to WE Social Enterprise and WE Day. They have literally inspired an entire generation of youngsters to become outstanding global custodians.
"We host 16 WE days throughout the world with 20,000 children at each event," Marc Kielburger told Lord Hastings. "You can't buy a ticket to one of these events, you have to earn it through good service. Prince Harry, Bono and others come and spend time with these kids and the message they give is `Thank you for changing the world'. We call each WE Day the Superbowl for making the world a better place. In order to engage with kids, and inspire them to be the next generation of philanthropists to tackle critical social issues, we have to incentivise behaviour from a young age.
"Last year, the WE Movement raised USD62 million and children did 20 million hours of community service. Rather than taking corporate dividends, we are taking stock options in making a better world."
Impact investing: A positive force for change
Another important manifestation of corporate governance, aside from philanthropy, is the way in which institutions invest their capital. Increasingly, impact investing is moving up the agenda of family offices, endowments and other large institutional investors. The aim is simple: to generate investment returns in different assets and investment strategies that simultaneously bring social and environmental benefits.
"Impact investing is investing in innovation that will help drive success for both society and the economy over the long-term" said Tania Carnegie, Leader of the Impact Ventures practice at KPMG. "Many institutional investors are already investing in impactful opportunities in emerging markets, real estate, and infrastructure so it's complementary to their current approach to asset selection."
Abigail Noble is the CEO of the ImPact, a non-profit organisation whose mission is to help families to make more impact investments, more effectively. Speaking on the Future Impact – Driving Change and Returns Through Investment panel, Noble said that family offices are engaging in impact investing because the next generation are interested in social impact and sustainability.
"It is a way for the next generation to take a leadership role within the family," said Noble. Also, it's a way to engage in new markets; private equity funds that focus on affordable housing, green energy companies, agricultural technologies that have a positive impact on the environment, etc. She said that while we were still at the early stages of measuring impact investing, "It will continue to evolve as the horsepower of analytics and greater collaboration improve."
Bringing an investor perspective to the debate, Dipender Saluja, Partner and Managing Director at Capricorn Investment Group, which manages USD5 billion in assets for the Jeff Skoll Foundation, sees energy, agriculture, healthcare and space as key sustainable investment opportunities, with technology the common theme in each.
"In the next 50 years, we are going to grow more food than we have in the last 10,000 years. As the world's population grows from seven billion to 10 billion people, and markets like China, India and Africa catch up with the rest of the world, we see huge opportunities in investing in those themes, with a positive impact. In India and China, the energy consumption, per capita, is 1/20th that of the West. Some two billion people have no access to reliable energy, food or transport and we think the opportunity to bring technology to these themes will create huge returns," outlined Saluja.
The positive impact of the clean energy revolution currently underway he said, can be easily measured in terms of the amount of employment it creates, the number of people who get access to new energy, the improvements in air quality (in electronic cars) and so on.
Aside from social and environmental benefits, there is also a jurisdictional benefit to impact investing. Chris Duggan is Director of CAIS and Vice President of Community Development at Dart Enterprises, a luxury real estate business focused on the Cayman Islands, founded by hedge fund billionaire Kenneth Dart.
"Kenneth Dart made a commitment when he moved his headquarters to Cayman and to create small business opportunities for Cayman locals to participate in development projects. The Kimpton Seafire is a good example of this. Profit motivation is key to all our businesses but so is the positive social impact on Cayman," said Duggan. In his view, impact investing needs to become more measurable: "This will enable us to get a clearer handle on what impact Dart Enterprises is having on the community, and learn about ways to improve how and where we invest our resources," suggested Duggan.
CAIS and Dart Enterprises both actively promote social and economic development on the Cayman Islands. For example, Minds Inspired is a Dart-funded series of educational initiatives that provide scholarship and learning opportunities to on-island high school and university students.
Alpha: The fuel for philanthropy
Impact investing and putting capital to work to encourage positive social and environmental change is a noble mission for any institution, undeniably, but institutions have a duty, first and foremost, to meet their long-time liabilities and safeguard the futures of Mom and Pop investors.
To that end, accessing the very best talent within the alternatives industry is the first step towards ensuring that corporations, endowments and family offices have the chance to harvest alpha in the market. This in turn can lead to long-term capital growth and a commitment to philanthropic causes.
What became apparent at CAIS 2017 was that pension plans, especially, face a universal challenge of fully funding their pension allocations.
Valerie Sill is President, CEO and CIO of Dupont Capital Management. According to Sill, Dupont's funding status currently stands at 84% and would require an additional USD8 billion to be fully funded today. To help try to meet return expectations, she said that private equity investments, specifically those focused on the small and mid-market, had proven effective in 2016, as had private credit.
"Alternatives are important for diversification, they can enhance the risk-adjusted returns and sometimes the level of returns, but you have to avoid the risk of over-diversification. We hold about 70% in return-seeking assets and 30% in liability hedging assets. We pursue a balanced asset allocation that has led us to have a 20 oer cent allocation in alternatives: 12% to private equity, 4% to hedge funds and 4% to real estate," confirmed Sill, when discussing innovations in asset allocation.
Achieving escape velocity
Corporate pensions need to continuously look for ways to innovate to generate the necessary returns but achieving that escape velocity – which one could argue is a 7 to 8% annual return stream – is no easy task.
Ron Barin is the Chief Investment Officer for Alcoa, having previously led the investment programme at Pfizer, and is highly regarded for his work in corporate risk factor investing.
Alcoa has a total of eight pension plans that cover more than 102,000 workers and retirees. According to its most recent 10-K filing, Alcoa's pension funds had USD8.1 billion in assets and USD11 billion in liabilities, at the end of 2016, for a 73.6% funding ratio.
Speaking alongside Sill on the Innovations in Asset Allocation panel, which was moderated by William Kelly, CEO of the CAIA Association, Barin said what he looked for from the hedge fund strategies that Alcoa allocates to is convexity.
"I'm looking to improve my funding status but I am also looking to mitigate downside risk, which could potentially wipe out my plan sponsor," said Barin. "By accessing diversified risk premia, I'm hoping to meet those objectives."
He said that currently, approximately half of the allocation is held in alternative strategies. The equity risk premium is extremely risky at this point in time, when all major asset classes are in a bubble because of central bank intervention, according to Barin. He said that in the current low rate environment, "No matter what I do, from an investment perspective, I can't generate the returns in excess of my liability return.
"There are a number of different levers that we are using, one of which is to consider liability management options. However, it can be costly to transfer liability to a third party, which might have negative impacts on our plan participants (i.e. reduced ERISA protections to plan holders). Ultimately, we tell our plan sponsors that they have to be patient while we innovate," said Barin.
Given the pressures that corporate pensions are under, seeking out the best alpha generators is an ongoing process. As Amanda Pullinger, CEO of 100 Women in Finance, pointed out at CAIS 2017, there needs to be a shift in mindset among institutional investors in terms of how they source talent.
Rather than going the tried and tested route, using existing networks to access male-led hedge funds, those with more innovative approaches are starting to engage more in conversation with female-led hedge fund managers, as well as firms with gender diverse investment teams. This is not rocket science; it's using one's imagination.
Moreover, allocators need to worry less about fees and more about close alignment with the manager. Their orbits need to be in close proximity.
"On the fee issue, you don't want to get caught in the notion of cheaper is better," said Mark Warner, Interim CEO and CIO, The University of Texas Investment Management Company (UTIMCO). "We focus on the talent first. I view fees as `what is the sharing of performance going to be?'"
How much skin in the game does the manager have? Do they take less risk if they have a lot of their own money invested?
"Fees themselves are less of an issue; we're not looking for the 2/20 Taco Bell hedge funds," asserted Jeffrey Klein, Deputy CIO, Federal Way Asset Management. "Institutional investors get too hung up on the quantum of the fees rather than the alignment of interests with the manager.
I'd like to see some of the Taco Bells shut down. I think the hedge fund industry needs a bit of a shake up."
Ultimately, institutions have the capacity and influence to shape future investing in such a way as to promote positive social and environmental change. The tectonic plates of the alternatives industry are shifting under foot. Nevertheless, it is in a unique position to leverage the capital markets to solve some of the world's greatest problems. The industry has a collective duty to step up and help.
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