Impact Investments Surpass $35 Billion | Chief Investment Officer

Investors including foundations, family offices, and pension funds had at least $35.5 billion committed to impact investments in 2015, according to a report by the Global Impact Investing Network (GIIN).

The sector’s growth has been “strong” and “steady,” GIIN said, with assets climbing 18% annually since 2013, when impact investments totaled $25.4 billion.

“The report illustrates that impact investing is a powerful movement driven by investors of all types who are effectively putting their capital towards solutions to issues in areas like conservation, education, and affordable housing,” said Amit Bouri, GIIN co-founder and CEO.

Private debt has remained by far the favored instrument for impact investing, representing $15.9 billion of total assets. However, last year also saw a “notable” increase in allocations via public equities and real assets.

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Investors surveyed by GIIN largely said they expected impact investments to achieve risk-adjusted returns equivalent to the market rate, though some (21%) were satisfied with returns in line with capital preservation.

Overall, investors were pleased with the investment performance of their commitments, with 15% citing outperformance and 70% reporting returns in line with expectations.

Challenges still remain in the sector, most prominently a lack of appropriate capital across the risk/return spectrum, shortage of high-quality investment opportunities with track records, and difficulty exiting investments, according to survey respondents.

However, some investors said they saw “significant progress” last year in these and other areas, including the availability of research and data and the level of government support for the market.

“The positive trends support that investors are increasingly bullish about the use of capital to address social and environmental challenges,” Bouri said. “We are confident this trend will continue.”

GIIN impact investments Source: GIIN’s “Impact Investing Trends: Evidence of a Growing Industry”

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Moody’s Investors Service downgraded the global asset manager industry to a ‘negative’ from ‘stable’ rating for 2017.

The ratings agency blamed accelerating flows into low-fee and passive products, fee pressure across almost all industry segments, regulatory initiatives constraining sales and increasing costs, and high asset valuations and global macro divergences increasing tail risks.

“Active management performance after fees continues to underwhelm,” said Neal Epstein, Moody’s vice president and senior credit officer, in a report. “Investors are remaining cost-conscious as skepticism of active management’s value proposition increases.”

Furthermore, global regulation is adding to fee pressures, Moody’s said. The downgrade comes on the heels of the US Department of Labor’s new fiduciary rule that promotes fee transparency while reducing conflicts of interest, “thereby rooting out excessive fees,” the report continued.

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“Relative performance and fee sensitivity are lessons that are being absorbed across the industry, and that’s a pressure that can build over time,” Epstein told CIO.

Moody’s further emphasized that low pension plan funding ratios and weak hedge fund performance contributed to fee pressures.

“The amount of effort it takes to try to build [hedge fund] portfolios and identify the managers has simply not kept up with the return, not to mention the cost of the product themselves,” Epstein said.

While some active managers have made efforts to overcome the difficult environment by expanding into smart beta, multi-assets, and alternatives, “organic growth remains a challenge for many active managers, while organic growth for passive managers outpaces the industry.”

Despite a negative outlook for next year, Moody’s said the asset management industry could return to a ‘stable’ rating through “improved active performance, moderation of rotation into passive products, stabilization of fee compression, cost structure adaptation, and stabilizing margins.”