Practical Applications Summary In Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees, from the Summer 2020 issue of The Journal of Retirement, authors William Reichenstein (of Social Security Solutions, Inc. and Retiree, Inc.) and William Meyer (also of Retiree, Inc.) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the tax torpedo. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. TOPICS: Wealth management, retirement, social security
{"title":"Practical Applications of Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees","authors":"William R Reichenstein, W. Meyer","doi":"10.3905/pa.8.4.415","DOIUrl":"https://doi.org/10.3905/pa.8.4.415","url":null,"abstract":"Practical Applications Summary In Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees, from the Summer 2020 issue of The Journal of Retirement, authors William Reichenstein (of Social Security Solutions, Inc. and Retiree, Inc.) and William Meyer (also of Retiree, Inc.) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the tax torpedo. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. TOPICS: Wealth management, retirement, social security","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127294400","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In The Value of Allocating to Annuities, from the Summer 2020 issue of The Journal of Retirement, author David Blanchett of Morningstar Investment Management explores the costs and benefits of including annuities in the mix of products financial advisors recommend to clients. Annuities have long been unpopular among investors and advisors, who perceive them as complex, expensive, and inflexible. But annuities provide one benefit other products cannot: guaranteed lifetime income. Blanchett says it is unwise to ignore this benefit, and investors and advisors should consider the relative cost of an annuity-inclusive vs. an investment-only strategy. Blanchett demonstrates that if advisors construct product mixes with moderate fees across annuities and investments, allocating an average of 30% to annuities generates an average alpha-equivalent benefit (that is, an additional return) of 0.73% relative to investment-only portfolios. Therefore, Blanchett says, advisors should educate themselves about annuities, to better identify the right annuity products and the clients for whom they make sense. TOPICS: Wealth management, retirement
晨星投资管理公司(Morningstar Investment Management)的作者大卫·布兰切特(David Blanchett)在《配置年金的价值》(The Value of allocation to年金)一书中探讨了将年金纳入理财顾问向客户推荐的产品组合中的成本和收益。长期以来，年金一直不受投资者和顾问的欢迎，他们认为年金复杂、昂贵、缺乏灵活性。但年金提供了其他产品无法提供的一个好处:终身收入保障。布兰切特说，忽视这种好处是不明智的，投资者和顾问应该考虑包括年金在内的投资策略与只投资策略的相对成本。布兰切特证明，如果投资顾问在年金和投资组合中构建费用适中的产品组合，那么平均分配30%给年金，相对于只投资的投资组合，平均α当量收益(即额外回报)为0.73%。因此，布兰切特表示，理财顾问应该对自己进行有关年金的教育，以便更好地识别正确的年金产品，以及这些产品对哪些客户有意义。主题:财富管理、退休
{"title":"Practical Applications of The Value of Allocating to Annuities","authors":"David Blanchett","doi":"10.3905/pa.8.4.414","DOIUrl":"https://doi.org/10.3905/pa.8.4.414","url":null,"abstract":"Practical Applications Summary In The Value of Allocating to Annuities, from the Summer 2020 issue of The Journal of Retirement, author David Blanchett of Morningstar Investment Management explores the costs and benefits of including annuities in the mix of products financial advisors recommend to clients. Annuities have long been unpopular among investors and advisors, who perceive them as complex, expensive, and inflexible. But annuities provide one benefit other products cannot: guaranteed lifetime income. Blanchett says it is unwise to ignore this benefit, and investors and advisors should consider the relative cost of an annuity-inclusive vs. an investment-only strategy. Blanchett demonstrates that if advisors construct product mixes with moderate fees across annuities and investments, allocating an average of 30% to annuities generates an average alpha-equivalent benefit (that is, an additional return) of 0.73% relative to investment-only portfolios. Therefore, Blanchett says, advisors should educate themselves about annuities, to better identify the right annuity products and the clients for whom they make sense. TOPICS: Wealth management, retirement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123488896","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In An Integrated Approach to Quantitative ESG Investing, from the February 2020 issue of The Journal of Portfolio Management, authors Mike Chen and George Mussalli (both of PanAgora Asset Management) propose a novel quantitative framework for optimizing both alpha and the environmental, social, and corporate governance (ESG) aspects of a portfolio. Although investors, especially those in the millennial generation, have become increasingly interested in the ESG aspects of the companies within their portfolios, there has not yet been a well-defined process for constructing portfolios that factors ESG principles into a strictly return-oriented model. Chen and Mussalli’s approach is based on three pillars: ESG factors that may also be alpha factors, a unique materiality value that links ESG considerations to alpha, and a portfolio construction framework that is informed by an investor’s ESG preferences. The key strengths of this integrated ESG modeling framework are its flexibility, relevancy, and dynamic nature. TOPICS: Portfolio theory, portfolio construction, ESG investing
{"title":"Practical Applications of An Integrated Approach to Quantitative ESG Investing","authors":"Mike Chen, George Mussalli","doi":"10.3905/pa.8.3.413","DOIUrl":"https://doi.org/10.3905/pa.8.3.413","url":null,"abstract":"Practical Applications Summary In An Integrated Approach to Quantitative ESG Investing, from the February 2020 issue of The Journal of Portfolio Management, authors Mike Chen and George Mussalli (both of PanAgora Asset Management) propose a novel quantitative framework for optimizing both alpha and the environmental, social, and corporate governance (ESG) aspects of a portfolio. Although investors, especially those in the millennial generation, have become increasingly interested in the ESG aspects of the companies within their portfolios, there has not yet been a well-defined process for constructing portfolios that factors ESG principles into a strictly return-oriented model. Chen and Mussalli’s approach is based on three pillars: ESG factors that may also be alpha factors, a unique materiality value that links ESG considerations to alpha, and a portfolio construction framework that is informed by an investor’s ESG preferences. The key strengths of this integrated ESG modeling framework are its flexibility, relevancy, and dynamic nature. TOPICS: Portfolio theory, portfolio construction, ESG investing","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116791270","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Securing Replacement Income with Goal-Based Retirement Investing Strategies, from the Spring 2020 issue of The Journal of Retirement, authors Lionel Martellini, Vincent Milhau (both of EDHEC-Risk Institute in Nice, France) and John Mulvey (of Princeton University) address how to provide investors with their minimum required retirement income while offering the flexibility to invest for growth (and potentially higher retirement income). Annuities and target-date funds offer either guaranteed income or flexibility, but not both at the same time. Martellini, Milhau, and Mulvey recommend a goal-based investing (GBI) strategy that consists of building blocks designed to realize different goals. The first building block is a retirement goal-hedging portfolio (GHP) consisting of bonds whose principal and interest payments can generate sufficient income for the first 20 years of retirement. After that, a deferred annuity can cover retirees’ income needs for the rest of their lives. The second building block is a performance-seeking portfolio (PSP) of long-term growth investments that offer the chance for upside and higher income after retirement. Financial advisors can be of great help to clients who adopt this strategy—constructing and managing GHPs and PSPs and recommending specific deferred annuities. TOPICS: Retirement, pension funds, wealth management
{"title":"Practical Applications of Securing Replacement Income with Goal-Based Retirement Investing Strategies","authors":"L. Martellini, Milhau Milhau, J. Mulvey","doi":"10.3905/pa.8.3.412","DOIUrl":"https://doi.org/10.3905/pa.8.3.412","url":null,"abstract":"In Securing Replacement Income with Goal-Based Retirement Investing Strategies, from the Spring 2020 issue of The Journal of Retirement, authors Lionel Martellini, Vincent Milhau (both of EDHEC-Risk Institute in Nice, France) and John Mulvey (of Princeton University) address how to provide investors with their minimum required retirement income while offering the flexibility to invest for growth (and potentially higher retirement income). Annuities and target-date funds offer either guaranteed income or flexibility, but not both at the same time. Martellini, Milhau, and Mulvey recommend a goal-based investing (GBI) strategy that consists of building blocks designed to realize different goals. The first building block is a retirement goal-hedging portfolio (GHP) consisting of bonds whose principal and interest payments can generate sufficient income for the first 20 years of retirement. After that, a deferred annuity can cover retirees’ income needs for the rest of their lives. The second building block is a performance-seeking portfolio (PSP) of long-term growth investments that offer the chance for upside and higher income after retirement. Financial advisors can be of great help to clients who adopt this strategy—constructing and managing GHPs and PSPs and recommending specific deferred annuities. TOPICS: Retirement, pension funds, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"86 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115056945","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns, in the July 2020 multi-asset special issue of The Journal of Portfolio Management, Bradford Cornell of the University of California in Los Angeles (UCLA) questions the dependability, and thus the investment utility, of correlations between stock characteristics and anticipated returns. How much can really be known about these relationships? His answer is, very little. Because these characteristics do not persist or recur predictably, any observed correlation between them and the future changes in average returns across asset classes has only limited practical use. Cornell identifies several impediments that undermine the reliability of stock characteristics as predictors of returns—including nonpersistence, model uncertainty, data snooping, and, especially, nonstationarity. These conditions make it difficult for investors to discern the real drivers of returns and to confidently forecast returns and relative future risk. The author advises market participants to be wary of investment approaches, including smart beta, that assume robust correlations between characteristics and future returns. TOPICS: Portfolio management/multiasset allocation, performance measurement
{"title":"Practical Applications of Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns","authors":"Bradford Cornell","doi":"10.3905/pa.8.3.411","DOIUrl":"https://doi.org/10.3905/pa.8.3.411","url":null,"abstract":"In Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns, in the July 2020 multi-asset special issue of The Journal of Portfolio Management, Bradford Cornell of the University of California in Los Angeles (UCLA) questions the dependability, and thus the investment utility, of correlations between stock characteristics and anticipated returns. How much can really be known about these relationships? His answer is, very little. Because these characteristics do not persist or recur predictably, any observed correlation between them and the future changes in average returns across asset classes has only limited practical use. Cornell identifies several impediments that undermine the reliability of stock characteristics as predictors of returns—including nonpersistence, model uncertainty, data snooping, and, especially, nonstationarity. These conditions make it difficult for investors to discern the real drivers of returns and to confidently forecast returns and relative future risk. The author advises market participants to be wary of investment approaches, including smart beta, that assume robust correlations between characteristics and future returns. TOPICS: Portfolio management/multiasset allocation, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"116 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132259801","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In Three Pillars of Modern Responsible Investment, from the 2020 ESG Special Issue of The Journal of Investing, Lloyd Kurtz of Wells Fargo Private Wealth Management dives into the three key tenets that support modern “responsible investment” activity. The first is alignment of portfolios with client interests. Alignment is usually accomplished through exclusions. The second is integration of environmental, social, and governance (ESG) factors into investment decision making. Integration emphasizes identifying factors that have a material influence on a company’s financial performance or valuation. The third is impact—achieving positive change though active ownership, usually in the form of engagement with corporate management. Evidence shows that exclusion-based alignment strategies can be applied without sacrificing the ability to closely track standard benchmarks. There is conflicting evidence as to whether asset managers can generate alpha based on integration of positive ESG factors, but somewhat stronger evidence exists to show that they can identify and manage risk based on negative ESG factors. Finally, some evidence supports the tenet that impact activities can produce improved financial results. TOPICS: ESG investing, portfolio theory, portfolio construction
{"title":"Practical Applications of Three Pillars of Modern Responsible Investment","authors":"L. Kurtz","doi":"10.3905/pa.8.3.409","DOIUrl":"https://doi.org/10.3905/pa.8.3.409","url":null,"abstract":"Practical Applications Summary In Three Pillars of Modern Responsible Investment, from the 2020 ESG Special Issue of The Journal of Investing, Lloyd Kurtz of Wells Fargo Private Wealth Management dives into the three key tenets that support modern “responsible investment” activity. The first is alignment of portfolios with client interests. Alignment is usually accomplished through exclusions. The second is integration of environmental, social, and governance (ESG) factors into investment decision making. Integration emphasizes identifying factors that have a material influence on a company’s financial performance or valuation. The third is impact—achieving positive change though active ownership, usually in the form of engagement with corporate management. Evidence shows that exclusion-based alignment strategies can be applied without sacrificing the ability to closely track standard benchmarks. There is conflicting evidence as to whether asset managers can generate alpha based on integration of positive ESG factors, but somewhat stronger evidence exists to show that they can identify and manage risk based on negative ESG factors. Finally, some evidence supports the tenet that impact activities can produce improved financial results. TOPICS: ESG investing, portfolio theory, portfolio construction","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115506639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In Fundamental Factors That Improve Your Investments: A Practical Guide, from the October 2019 issue of The Journal of Investing, authors Pim Lausberg (of APG Asset Management), Alfred Slager (of TIAS School for Business and Society), and Philip Stork (of VU University Amsterdam) explore the influence of fundamental factors—rather than style factors—on portfolio returns. The authors present an intuitive framework for measuring and steering fundamental factors in a portfolio and provide examples showing how to identify factor concentration risks and tilt portfolios to desired exposures. They also offer suggestions on how investors can embed the factor-based approach in their existing investment process. TOPICS: Analysis of individual factors/risk premia, portfolio construction, performance measurement
{"title":"Practical Applications of Fundamental Factors That Improve Your Investments: A Practical Guide","authors":"Pim Lausberg, Alfred Slager, Philip A. Stork","doi":"10.3905/pa.8.3.408","DOIUrl":"https://doi.org/10.3905/pa.8.3.408","url":null,"abstract":"Practical Applications Summary In Fundamental Factors That Improve Your Investments: A Practical Guide, from the October 2019 issue of The Journal of Investing, authors Pim Lausberg (of APG Asset Management), Alfred Slager (of TIAS School for Business and Society), and Philip Stork (of VU University Amsterdam) explore the influence of fundamental factors—rather than style factors—on portfolio returns. The authors present an intuitive framework for measuring and steering fundamental factors in a portfolio and provide examples showing how to identify factor concentration risks and tilt portfolios to desired exposures. They also offer suggestions on how investors can embed the factor-based approach in their existing investment process. TOPICS: Analysis of individual factors/risk premia, portfolio construction, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128753033","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns, in the July 2020 multi-asset special issue of The Journal of Portfolio Management, Bradford Cornell of the University of California in Los Angeles (UCLA) questions the dependability, and thus the investment utility, of correlations between stock characteristics and anticipated returns. How much can really be known about these relationships? His answer is, very little. Because these characteristics do not persist or recur predictably, any observed correlation between them and the future changes in average returns across asset classes has only limited practical use. Cornell identifies several impediments that undermine the reliability of stock characteristics as predictors of returns—including nonpersistence, model uncertainty, data snooping, and, especially, nonstationarity. These conditions make it difficult for investors to discern the real drivers of returns and to confidently forecast returns and relative future risk. The author advises market participants to be wary of investment approaches, including smart beta, that assume robust correlations between characteristics and future returns. TOPICS: Portfolio management/multiasset allocation, performance measurement
{"title":"Practical Applications of Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns","authors":"Bradford Cornell","doi":"10.3905/pa.8.2.411","DOIUrl":"https://doi.org/10.3905/pa.8.2.411","url":null,"abstract":"In Stock Characteristics and Stock Returns: A Skeptic’s Look at the Cross Section of Expected Returns, in the July 2020 multi-asset special issue of The Journal of Portfolio Management, Bradford Cornell of the University of California in Los Angeles (UCLA) questions the dependability, and thus the investment utility, of correlations between stock characteristics and anticipated returns. How much can really be known about these relationships? His answer is, very little. Because these characteristics do not persist or recur predictably, any observed correlation between them and the future changes in average returns across asset classes has only limited practical use. Cornell identifies several impediments that undermine the reliability of stock characteristics as predictors of returns—including nonpersistence, model uncertainty, data snooping, and, especially, nonstationarity. These conditions make it difficult for investors to discern the real drivers of returns and to confidently forecast returns and relative future risk. The author advises market participants to be wary of investment approaches, including smart beta, that assume robust correlations between characteristics and future returns. TOPICS: Portfolio management/multiasset allocation, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"92 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133834354","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In An Integrated Approach to Quantitative ESG Investing, from the February 2020 issue of The Journal of Portfolio Management, authors Mike Chen and George Mussalli (both of PanAgora Asset Management) propose a novel quantitative framework for optimizing both alpha and the environmental, social, and corporate governance (ESG) aspects of a portfolio. Although investors, especially those in the millennial generation, have become increasingly interested in the ESG aspects of the companies within their portfolios, there has not yet been a well-defined process for constructing portfolios that factors ESG principles into a strictly return-oriented model. Chen and Mussalli’s approach is based on three pillars: ESG factors that may also be alpha factors, a unique materiality value that links ESG considerations to alpha, and a portfolio construction framework that is informed by an investor’s ESG preferences. The key strengths of this integrated ESG modeling framework are its flexibility, relevancy, and dynamic nature. TOPICS: Portfolio theory, portfolio construction, ESG investing
{"title":"Practical Applications of An Integrated Approach to Quantitative ESG Investing","authors":"Mike Chen, George Mussalli","doi":"10.3905/pa.8.2.413","DOIUrl":"https://doi.org/10.3905/pa.8.2.413","url":null,"abstract":"Practical Applications Summary In An Integrated Approach to Quantitative ESG Investing, from the February 2020 issue of The Journal of Portfolio Management, authors Mike Chen and George Mussalli (both of PanAgora Asset Management) propose a novel quantitative framework for optimizing both alpha and the environmental, social, and corporate governance (ESG) aspects of a portfolio. Although investors, especially those in the millennial generation, have become increasingly interested in the ESG aspects of the companies within their portfolios, there has not yet been a well-defined process for constructing portfolios that factors ESG principles into a strictly return-oriented model. Chen and Mussalli’s approach is based on three pillars: ESG factors that may also be alpha factors, a unique materiality value that links ESG considerations to alpha, and a portfolio construction framework that is informed by an investor’s ESG preferences. The key strengths of this integrated ESG modeling framework are its flexibility, relevancy, and dynamic nature. TOPICS: Portfolio theory, portfolio construction, ESG investing","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123312783","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In Three Pillars of Modern Responsible Investment, from the 2020 ESG Special Issue of The Journal of Investing, Lloyd Kurtz of Wells Fargo Private Wealth Management dives into the three key tenets that support modern “responsible investment” activity. The first is alignment of portfolios with client interests. Alignment is usually accomplished through exclusions. The second is integration of environmental, social, and governance (ESG) factors into investment decision making. Integration emphasizes identifying factors that have a material influence on a company’s financial performance or valuation. The third is impact—achieving positive change though active ownership, usually in the form of engagement with corporate management. Evidence shows that exclusion-based alignment strategies can be applied without sacrificing the ability to closely track standard benchmarks. There is conflicting evidence as to whether asset managers can generate alpha based on integration of positive ESG factors, but somewhat stronger evidence exists to show that they can identify and manage risk based on negative ESG factors. Finally, some evidence supports the tenet that impact activities can produce improved financial results. TOPICS: ESG investing, portfolio theory, portfolio construction
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