INTERVIEW: Threshold Group’s CIO On Impact Investing Trends In Wealth Management

INTERVIEW: Threshold Group’s CIO On Impact Investing Trends In Wealth Management

Eliane Chavagnon, Editor - Family Wealth Report
January 29, 2016

Family Wealth Report spoke to the chief investment officer at Threshold Group about the firm’s latest thoughts on impact investing.

The field of impact investing is mushrooming as companies and individuals the world over intensify their focus on global sustainability and the environment generally.

The total amount of US-domiciled assets under management using SRI strategies expanded by 76 per cent from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, according to US SIF’s latest report, US Sustainable, Responsible and Impact Investing Trends. These assets now represent over one in every six dollars under professional management in the US, the report said. 

Wealthy families in particular are increasingly seeking to invest their capital in a way that allows them to “do well while doing good” and the discipline has, arguably, become a crucial aspect of a family office’s investment value proposition.

“US SIF has seen evidence, both anecdotal and not, that a growing number of high net worth individuals and families are exploring ways to invest for impact,” Lisa Woll, chief executive at US SIF, told this publication. “This is particularly true for Millennials and women, two subsets of HNW individuals that are increasingly inheriting wealth and playing a bigger role in family finances.”

Single family offices allocate 30 per cent of their asset allocation, and multi-family offices 19 per cent, to impact investing, according to The Financial Times’ Investing for Global Impact 2015 report. The spread is however considerable, it said; while for a substantial number it constitutes no more than 1 per cent of AuM, there are exceptions where much higher proportions are allocated – exceptionally, up to 100 per cent.

“The stand-out statistic is not particularly surprising – that 75 per cent of foundations active in impact investing have become so in the last five years,” the FT’s report said. “The equivalent figure for family offices is 53 per cent, with another 24 per cent who started impact investing in the 2006-9 period.”

The impact investing sector is dynamic and changing rapidly. One prominent wealth management player is Threshold Group, which traces its roots back to when George Russell sold Russell Investments to Northwestern Mutual and launched a single family office with the proceeds of the sale. A multi-family office since 1999, Threshold’s mission to help wealthy clients “ignite the full potential of their assets” reflects George Russell and the Russell family’s two passions: philanthropy and investing, said Ron Albahary, chief investment officer at the firm since 2011.

“Impact investing in our view is the convergence of those two passions,” Albahary told Family Wealth Report. “We have been quietly but methodically building out our impacting investing capabilities, the catalyst having been the Russell family foundation asking us to look at how they could create more mission-aligned portfolios.”

Threshold Group today has around $3 billion in assets under management, of which about $1 billion belongs to clients who have “at least declared” that they want to move closer towards mission-investing alignment, Albahary said, speaking about some of the trends he is seeing in the impact investing space. The wealth management firm and multi-family office has branches in Seattle, WA, and Philadelphia, PA.

Trends

The impact sector – which the Global Sustainable Investment Alliance defines as “targeted investments aimed at solving social or environmental problems” – is evolving in a number of ways.

One trend is that the discipline is increasingly no longer viewed as the sole domain of ultra high net worth investors, Albahary said. Millennials are in many instances taking the reins and fueling demand at the family office level, for example, while asset managers are democratizing the playing field by creating products such as mutual funds and exchange-traded funds for individuals that don’t necessarily fall in the HNW investor category. In October 2015, for example, BlackRock launched the BlackRock Impact US Equity Fund, a mutual fund for investors that aims to invest in measurable social and environmental outcomes with “competitive financial returns.”

Capitalizing on the expansion of the environmentally and socially-responsive toolkit in the ETF and mutual fund space, Threshold has also developed investment solutions designed to provide hedge fund-like risk/return characteristics to address not only the needs of Millennials but any portfolio requiring such a risk/return profile in a more liquid format, Albahary said.

Some of the things Threshold has been up to in recent months on the impact investing front highlight some of the other areas where the firm is seeing demand from clients for impact investments.

In June last year, the firm rolled out a platform focused on regional economic development in the Pacific Northwest, called Invest NW. As families and their foundations value their heritage and its relationship to their community and regional roots, the firm is seeing rising client demand for investments that catalyze innovation and betterment close to home.

“We’ve seen a lot of demand in the Pacific Northwest from existing clients who love that region – that is where they’ve made their wealth – and they want to reinvest in the region,” Albahary said. “Place-based investing seems to be an area that is developing where the tools – while growing – are still limited because when you narrow your focus on a region it becomes more challenging to find associated strategies.” He added that the firm is considering a similar effort on the East Coast.

Meanwhile, in 2015 Threshold joined forces with Trucost to provide carbon audits of investment portfolios, particularly those of family foundations. The two firms have also been working together to develop a “decision making framework” to assess the carbon risk exposures of underlying assets in derivative investments.

“I would caution that another trend we’re seeing – which is sort of a negative by-product of more activity here – is green washing,” Albahary said. “If you’re truly focused on the impact of your strategy, you must be able to quantify it. Managers need to be held accountable for the impact metrics of success. You can’t say you’re doing something good but only measure successful investment performance.”

Threshold is also very active in the private equity space – primarily on the venture capital side, as when clients have a very specific impact focus it can be difficult to find that level of granularity outside the illiquid sector. The challenge, of course, is that these investments are typically only suitable for very wealthy clients due to their illiquid nature and high investment minimums.

Among other related highlights last year, Threshold brought in Stephanie Rupp as managing director of impact investing – a new role at the firm.

Words of Caution

Indeed as previously mentioned, the sector is dynamic and changing rapidly, which can amplify existing challenges. Albahary said he has at times picked up on generational tensions, where older family members are somewhat skeptical that impact investing can generate compelling investment results, whereas Millennials are really pushing for it. Families are therefore having to reconcile these two objectives and develop a strategy that can satisfy both.

In addressing this, Threshold uses family foundations as an opportunity to bring generations together in a “catalytic discussion” that revolves around impact investing, Albahary said. Conversations tend to focus on what impact investing is, what it means in terms of the family’s mission and what contribution it can make to the portfolio’s financial outcomes.

It is clear that more and more wealthy families are getting involved in some shape or form with impact investing – a trend that is likely to only accelerate. But this should be approached carefully, Albahary cautioned. When some investors finally start thinking about the make-up of their portfolios, and how they can or should shape them more around their goals, they get the “impact bug” and want to go to the extreme, he explained. “But it’s important to remind them that this is an evolution, not a revolution. As you increase your alignment more as a percentage of the portfolio, the process becomes increasingly difficult, given the lack of strategies in the marketplace.”

This article is reproduced with the permission of Clearview Financial Media Ltd, publishers of FamilyWealthReport (www.familywealthreport.com).

About Threshold Group
Threshold Group is a family-owned wealth management firm, dedicated exclusively to serving families, individuals and family foundations. It serves clients in more than 25 states. The company provides integrated investment guidance, financial planning, legacy planning and family office services – all aimed at helping clients achieve their missions and priorities. Threshold Group is a Registered Investment Advisor, with approximately $3 billion of assets under management (AUM) as of December 31, 2014. Approximately a third of the firm’s current assets under management is for clients who have set the objective of aligning their portfolios with their missions. Offices are in Seattle, Gig Harbor, Wash. and Philadelphia. Threshold Group may be reached at 888-252-3889.

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