Thought Leadership

Green investing has been a socially responsible investment strategy to give institutional investors and their beneficiaries some comfort knowing they were supporting the environment. As environmental concerns impact large multinational companies, policymakers, and individuals worldwide, institutional investors have begun to recognize green investing as a financially attractive sector. The green opportunity set is broad; it includes renewable energy, energy storage, energy efficiency, environmental services, and environmental resources. While growth drivers support exposure to the green sector, there are many inherent risks to green investing, including market, execution, technology, financing, commodity pricing, and regulatory changes. This report should serve as a primer on green investment merits and considerations. We conclude that investors should consider some of the more compelling green investment strategies, but avoid strategies that do not offer an attractive risk-adjusted return.

Stable value is offered by 60% of all DC plans, including 75% of DC plans with 1,000 or more participants, in the United States and participants have allocated over 19% of their totals assets to this fund vehicle1. Without question, participants appreciate stable value’s key features including consistent, steady returns and principal preservation.

EnnisKnupp’s capital markets modeling assumptions play a critical role in the advice rendered to clients, given the impact of the asset allocation decision on the success of the overall investment program. Continued changes in the market environment have resulted in adjustments to our projections, which are presented here in our most recent biannual assumptions update.

As institutional investors increase their allocations to non-domestic securities, the associated currency risk becomes an increasingly pertinent subject in need of addressing. Our advisory position on currency hedging is that for most clients, the drawbacks can be significant and the benefits over the longterm may be small and are not guaranteed. There are no easy answers in regards to currency management. In this paper we provide background on the currency market, develop a decision making framework as it pertains to whether or not to hedge currency, and share our thoughts and experience in regards to implementation should clients determine hedging currency is appropriate given their specific circumstances.

Treasury Inflation-Protected Securities (TIPS) are government secured debt instruments that are structured to provide a hedge against unexpected inflation. TIPS appeal to risk-averse investors who are concerned about losing purchasing power of an investment over a short time. A TIPS option gives investors some short-term protection against unexpected inflation.

Most participants with a long time horizon, however, will find that a combination of stocks and bonds delivers a higher expected return, net of inflation. A dedicated TIPS investment option in a defined contribution plan is appropriate when used as a complementary fixed income alternative relative to a broad intermediate fixed income option.

Real estate offers the potential to diversify investment portfolios of long-term investors. Real estate cash flows, which are as bond-like as they are stock-like, are different enough from stock and bond flows to warrant the inclusion of diversified, conservative real estate in mixed asset portfolios. An added advantage of real estate over bonds is its potential as an inflation hedge.

The recent favorable performance of real estate investment trusts has drawn new attention to this vehicle. This research piece illustrates the historical correlation between the REIT premium or discount to underlying net asset value and future three-year returns. We find that when investors pay more than net asset value for the real estate, their future three-year return has tended to suffer. The opposite has been true when investors have bought at a discount. While this research is not meant to be used as a market timing tool, it is one small piece of information an investor should consider in deciding whether to initiate or increase REIT exposure.

Short selling is a trading technique in which an investor hopes to profit from a decline in the price of a stock. To short a stock, an investor borrows and sells the security with the intention of returning it after buying it back at a lower price. A profit is made if the stock is purchased at a lower price than the short sale price. Since short sellers incur losses when stock prices advance, they experience opposite fortunes resulting from price movements when compared with the traditional long positions of typical investors.

Private equity “secondaries” are purchases of interests in an existing partnership from a limited partner. The private equity secondary market has grown in both size and complexity with the exponential growth of the asset class in the past 20 years. It is important to understand the risks and rewards of such investments before making an investment decision. This report describes the history of private equity secondaries and, characteristics of the secondary market, and evaluates the benefits and challenges of investing in secondaries, and various ways to participate in secondary investments.

Voices in the media seem to be getting louder and louder with sayings like…“Why throw good money after bad?”, “Don’t try to catch a falling knife”, “Wait things out until the market settles down”. These statements seem logical on their face, which is one of the reasons why they gain such traction. Especially when the momentum of the stock market appears headed one way (down) and every piece of news that comes out seems much worse than the last. Not only do the shouts from the crowd give investors cause for concern, but the field of behavioral finance demonstrates that our own innate human tendencies work against us as well, as most individuals exhibit the bias of extrapolating recent events well into the future.