Gender Lens Investing
Looking at the largest companies in the world, one clear thing stands out: women are extremely underrepresented in all management levels. In fact, nearly 40% percent of senior leadership teams are all-male, and less than 11% of senior executives at Global Fortune-500 companies are women.
While this is a clear example of gender inequality and bias, it is to these companies’ detriment, given that women-led teams are outperforming their male counterparts in both private and public companies. This outperformance is why gender lens investing is worthy of one’s consideration, and why it’s a mistake to ignore this factor in one’s investment portfolio.
What is Gender Lens Investing?
Gender Lens Investing is an investment strategy which integrates gender analysis into the investment process, not only to inform decision-making, but also advance gender equality. This includes investing in companies that are run by women, have women on their corporate boards, and/or have women in senior management positions.
It also involves investing in companies that promote gender equality in their workplace and companies which offer products/services that improve the lives of women and girls. Given the long history of gender inequality, a focus on gender diversity is imperative in the corporate world.
Why Choose Gender Lens Investing?
Some investors might question the relevance of gender lens investing as an investment strategy, but the results speak for themselves. In fact, women-led private tech companies see 35% more return on investment and generate revenues that are 12% higher than their male counterparts.
Another incredible statistic shared by American Express is that growth of women-owned small businesses with $10MM or more in revenue is 50% faster. This may be due to neurological differences, with research from McMaster University suggesting that female board members make decisions differently and rely on complex moral reasoning. Meanwhile, men tend to base their decisions on rules and traditions. This makes women better problem solvers, a key trait for leadership. This research is corroborated by a study by Zenger and Folkman which surveyed leadership skills among 4,700 women and 3,800 men. The results were significant: women outscored men in 89% of categories that differentiate an excellent leader from an average one. These include taking initiative, resilience, integrity/honesty and practicing self-development.
In another study, Goldman Sachs found that companies with a higher percentage of female employees generate 300 basis points of excess alpha (excess return on investment relative to its benchmark) within the Goldman Sachs framework.
Even with all of these impressive statistics, there are only 41 female CEOs in the Fortune 500. Women also make up only 27% of the board seats in the Fortune 500.
How To Participate In Gender Lens Investing?
Unfortunately, many people make the mistake of overlooking gender diversity in their investment strategy. Clearly, there are significant benefits to gender lens investing from a return standpoint.
There are many ways to participate in this trend through investing in women-led companies but diversification is essential. Diversification has been proven to be a superior strategy when it comes to allocating capital. Therefore, a good solution is investing in ETFs and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access gender lens investing strategies.
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The information and data are as May 31, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Human Capital
What Is Human Capital?
An organization is often said to only be as good as its people from top to bottom, which is why human capital is so important to a company.
The term human capital simply refers to the economic value of a company’s workers’ experience and skills. The Organisation for Economic Co-operation and Development (OECD) defines it this way: “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances.”
The whole concept of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his book, “An Inquiry into the Nature and Causes of the Wealth of Nations”. In the book, Adams suggested that improving human capital through training and education leads to a more profitable enterprise, which adds to the collective wealth of society. According to Smith, that makes it a win-win for everyone.
Then, in the 1950s and early 1960s, Nobel Prize winners and University of Chicago economists Gary Becker and Theodore Schultz were among those primarily responsible for the development of the theory of human capital. Becker realized the investment in workers was little different for a company than investing in capital equipment.
Fast forward to today and human capital is extremely important to businesses because it is believed to be a big boost to productivity, which leads to gains in profitability. That is why many companies invest in their employees, such as paying for education and training.
In effect, the chances of a company’s success becomes higher as it nurtures its human capital.
Why Invest Using the Human Capital Factor Strategy?
Today, we live in a new investing reality. Many large institutional investors pay close attention to ESG (environmental, social and governance) factors. And one crucial ESG factor is human capital management.
This focus makes sense since, increasingly, a greater share of a company’s value is derived from its people—who generate intellectual property—rather than its physical property and equipment.
Research from Dan Ariely, Duke University professor of psychology and behavioral economics, focused on the links between human capital management and an organization’s overall performance. He found that authentic feelings of appreciation and fairness (broadly defined) are key elements of an organization’s culture that are connected to higher productivity.
There is other research showing that turnover data (think the Great Resignation) can be revealing. Companies with higher turnover correlate with weaker performance versus its peers.
All of this academic research is important to investors. Corporate balance sheets treat human capital as part of a company’s intangible assets. That’s always been true, but it matters much more now. In 1985, only 32% of the market value of the S&P 500 were intangible. By 2020, that share had grown to 90%.
In other words, intangible assets – including human capital – are increasingly valuable and need careful management to ensure profitability. That’s why many CEOs truthfully say that a company’s employees are our greatest asset.
Human Capital Investing
This new-found focus on human capital has led to a new entrant in the landscape of factor investing.
According to J.P. Morgan, the Human Capital Factor (HCF) – a strategy that analyzes certain employee perceptions such as pride, purpose, and psychological safety – has demonstrated that it may be more relevant to a company’s stock performance than other investment factors.
This strategy was developed by an investment research firm called Irrational Capital, co-founded by the aforementioned Dan Ariely. HCF quantifies corporate culture by studying employee behaviors and motivations, rather than by just looking at things like compensation packages or the number of diverse members on the board.
In other words, it is a data-driven strategy that tries to capture the link between strong corporate culture and the value of a company’s stock. Companies with a high HCF score seem to have an edge on their competitors.
J.P. Morgan analyzed HCF’s performance across a wide range of indices, including the Nasdaq, Russell 1000, and MSCI USA. By back-testing stock performance data from 2015, J.P. Morgan found that the Nasdaq HCF Long portfolio delivered an excess return of 3.1%, while the Nasdaq HCF Long-Short portfolio generated a significantly higher annual return of 13.3%. For the Russell 1000 and MSCI USA indices, the HCF Long portfolios delivered excess returns of 3.7% and 6.2%, respectively.
The J.P. Morgan report concluded that “within the tech-heavy Nasdaq, the HCF is highly proficient at identifying underperformers.”
How to Invest in Human Capital
A smart focus on material ESG factors, such as human capital, can potentially lead you to better risk-adjusted returns.
Finding and analyzing information about human capital management requires considerable research. However, there are funds that have done the legwork for you. These can be found with an AI-aided search at www.magnifi.com.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as May 31, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Closed-End Funds
What Are Closed-End Funds?
A closed-end fund (CEF) is a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange like a stock. However, no new shares will be created and no new money will flow into the fund.
In contrast, an open-end fund, such as most mutual funds and exchange-traded funds (ETFs), accepts a constant flow of new investment capital. These funds issue new shares on a continuing basis.
Like many mutual funds, a closed-end fund has a professional manager overseeing the portfolio and actively buying, selling, and holding assets. Closed-end funds are registered with the Securities and Exchange Commission (SEC) and subject to SEC regulation. In addition, the funds’ investment advisers are also registered with the SEC.
And like any stock or ETF, closed-end fund shares fluctuate in price throughout the trading day. But a closed-end fund generally is not required to buy its shares back from investors upon request (not directly redeemable).
Closed-end funds are allowed to hold a greater percentage of illiquid securities in their investment portfolios than mutual funds are. An “illiquid” security generally is considered to be a security that cannot be sold within seven days at the approximate price used by the fund in determining NAV.
However, closed-end funds and open-end mutual funds do have some similarities, including making distributions of income and capital gains to their shareholders as well as charging an annual expense ratio for their services.
Why Invest in Closed-End Funds?
Investors have two potential ways to make money with closed-end funds: income, paid via dividend distributions, or growth, that is produced by the fund’s investments. And, you may be able to buy shares of the fund at a discount to its net asset value (NAV).
Perhaps the most unique characteristic of a closed-end fund is its pricing.
The net asset value of the fund is calculated regularly, based on the value of the assets in the fund. However, the price that it trades for on the exchange is market-driven. This means that a closed-end fund can trade at a premium or a discount to its NAV. (A premium price means the price of a share is above the NAV, while a discount is below NAV value.)
There are several possible reasons for this. A fund’s market price may trade at a premium because it is focused on a sector that is currently popular with investors, or because its manager is well regarded among investors. On the other hand, a history of underperformance or volatility may make investors wary of the fund, pushing down its share value to a discount to its NAV.
Most often, your best odds of success come when you buy a closed-end fund at a discount to its net asset value. That’s why many investors aim to buy closed-end funds at a substantial discount. How substantial? It’s not uncommon to find closed-end funds trading at 10% or even 15% below their net asset value.
This might not sound like a lot, but that kind of discount could give you a built-in edge on the market. Not only could you gain if the fund’s holdings rise in value, you may also benefit if the discount to net asset value has decreased and you decide to sell your shares.
Fixed-income investors are often attracted to closed-end funds because many provide a steady stream of income, usually on a monthly or quarterly basis. This is more favorable than the typical biannual payments provided by individual bonds.
Investors generally have the option of receiving distributions in cash or having their distributions reinvested. By automatically reinvesting dividends, investors purchase additional closed-end fund shares on an ongoing basis, which has the potential to lead to higher future returns.
Keep in mind though that many closed-end funds make use of leverage (borrowed money) to boost their returns and dividends to investors. That means higher potential rewards in good times and higher potential risks in bad times.
How to Invest in Closed-End Funds
Closed-end funds can be bought through any brokerage firm just like stocks.
Your search for the right closed-end fund can be made much easier by using Magnifi, a search-based investing platform that can help match investments to your goals. Magnifi’s AI driven system finds investment suggestions for you based on just a few inputs of your data, such as risk tolerance and investment time horizon.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as May 24, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Carbon
Carbon is a term used to describe carbon dioxide (CO2) and other greenhouse gas emissions, which build up in our atmosphere and lead to climate change.
A new record reading for the highest daily level of carbon dioxide in the atmosphere was set in early May 2022, ringing alarm bells about the pace of global warming.
The daily record of 421.37 parts per million CO2 was recorded at Mauna Loa by the Scripps Institute of Oceanography, with similar numbers reported by the National Oceanographic and Atmospheric Administration.
What Is Carbon Investing?
Investors are increasingly looking to invest in ways that align with their values, which often include climate concerns. One way to do this is by investing in carbon credits. A carbon credit is a certificate or permit that represents a reduction in carbon emissions, with one credit representing one metric ton of carbon dioxide.
Companies that emit less than their permitted amounts of carbon can sell their excess permits on the market. While those firms that exceed their limit must purchase these carbon credits.
There are two types of carbon credit systems: voluntary and regulatory.
In a voluntary system, companies use carbon credits to track their greenhouse gas emissions. The most common form of this system is called an “offset,” in which carbon credits are created through greenhouse gas reducing practices, such as planting a forest or running carbon-capture systems. However, there is no enforcement mechanism in a voluntary system.
A regulatory system is one in which a government issues carbon credits. A regulatory body will set a cap on how much carbon dioxide an industry or economy can emit in a given year then release credits meeting that amount. Companies can sell and trade these credits among themselves. This creates a private market for carbon emissions known as cap and trade; the government has capped emissions, but allows companies to trade those credits privately to determine their most efficient use. Once issued, credits do not expire.
However, this market is still in its early stages globally. These programs aren’t yet common in the U.S. as they are elsewhere (for example, Europe), but several states have joined regional initiatives to enact such policies.
Why Invest in Carbon Credits
There is no doubt the market for carbon credits is growing by leaps and bounds.
The Taskforce on Scaling Voluntary Carbon Markets forecasts that, in order to meet the climate change targets as set forth in the Paris Agreement, the voluntary carbon markets will need to grow 15-fold by 2030 – and 100-fold by 2050 – from 2020 levels.
That makes it a fast-growing asset class. According to Refinitiv, in 2021 the size of the global carbon market reached $851 billion, compared to only $270 billion in 2020. Wood Mackenzie, a commodities consulting firm, expects that the market could reach a breathtaking $22 trillion by 2050.
Carbon credits were one of the best-performing asset classes in 2021.
The IHS Markit Global Carbon Index returned 108% in 2021. The index tracks the futures of the major global carbon markets including Europe, California (also tied to certain Canadian provinces), and RGGI (Regional Greenhouse Gas Initiative, which covers the U.S. states from Virginia up to Maine. The European Union carbon allowance (EUA) futures returned 138% over the year, California returned 73%, and the RGGI returned 68%.
There is also a related asset – carbon offsets, of which there are two types.
An Avoidance Offset is a contractual agreement registered with an exchange that avoids pollution in the first place. Examples include paying landowners to not cut down trees or incentivizing farmers to not turn grasslands into crops.
A Removal Offset is taking carbon out of the atmosphere through, for example, reforestation.
However, there are not, as yet, many ways to invest in carbon credits and offsets (although there likely will be more in the future). With that said, here are a few ways investors can get started.
How to Invest in Carbon
One way is to purchase carbon-credit futures that trade on the Chicago Mercantile Exchange.
However, the easiest way is through a carbon-credit exchange-traded fund (ETF) that tracks the performance of the carbon market via carbon-credit futures contracts. There are now several of these on the market.
There is also a new ETF that tracks carbon offset futures contracts, which also trade on the Chicago Mercantile Exchange.
To help in your search for investments focused on climate change, check out www.magnifi.com. You just type in a term like “green funds” and instantly get relevant results (ETFs, funds, etc.) presented to you.
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with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as May 18, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
International Equities
The United States is home to some of the largest companies in the world. But it is important to remember that there are many great companies outside of the U.S too. Overall, 80% of the world’s investable securities are outside of the U.S., as does 40% of the world’s market capitalization.
International markets are usually divided into two broad categories:
- Developed markets are similar to the United States. That is, they are countries that have established industries, widespread infrastructure and a relatively high standard of living. Examples of developed markets include the United Kingdom, Japan, Australia, Canada, and Germany.
- Emerging markets are countries that have developing capital markets and less-stable economies. However, they’re considered to be in the process of transitioning into developed markets, and often have much more rapid growth than already-developed economies.
Currently, emerging markets make up about 15% to 20% of international markets in total. Examples of emerging markets include India, China, Poland, Indonesia, South Africa, Mexico, and Brazil.
International markets can also be divided regionally. These include:
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- Asia-Pacific (Australia, Japan, China, India, Singapore).
- Europe (United Kingdom, France, Spain, Germany, Italy, Norway).
- Latin America (Brazil, Mexico, Argentina, Chile)
- Africa and the Middle East (South Africa, Egypt, Saudi Arabia)
Why Invest Internationally?
Markets outside the United States often don’t always rise and fall at the same time as the domestic market. In other words, failing to look across the U.S. border at shares of overseas companies means you’re overlooking complementary assets—securities that may zig when the U.S. zags.
One major reason for the difference in performance is the fact that different sectors make up large percentages of the indexes.
For example, in the United States, technology stocks make up about 28% of the S&P 500 index. In Europe, in the Stoxx 600 index, the two largest sector weightings are healthcare and industrial goods and services.
The recent outperformance of U.S. equity markets isn’t the natural state of affairs. History shows that stock market leadership has alternated between the U.S. and international stocks numerous times over the past four-plus decades.
There have been distinct periods of international dominance, including a time in the 1980s when Japan’s bull market crushed that of all other countries, and another in the early 2000s after a string of accounting scandals rocked the U.S. Excluding international equities precludes your portfolio from taking advantage of these periods of international outperformance.
Bottom line – domestic investing and the pull to buy only U.S. stocks is real, and it only grew stronger during the historic U.S. bull market run over the past decade. But this bias leaves investors vulnerable to a possible extended period of U.S. equity underperformance, which could have a lasting negative impact on your portfolio.
How to Invest in International Equities
Many financial advisers recommend putting 15% to 25% of your money in overseas stocks. This allocation is meaningful enough to make a difference to your portfolio, but not too much to hurt you if those markets temporarily fall out of favor.
There are a few ways you can invest in international markets via funds or ETFs:
International funds invest only in foreign markets, excluding the United States.
Global or world funds provide exposure to both foreign and U.S. markets.
Regional funds invest primarily in a specific part of the world, such as Europe or Asia.
Developed markets funds focus on foreign countries with developed economies, like Japan, Germany, or the United Kingdom.
Emerging markets funds invest in countries that are considered to have still-developing economies, such as India, Brazil, or China.
You can also access international stocks via American Depository Receipts (ADRs). ADRs are certificates issued by U.S.-based financial institutions that represent a share of a foreign company’s stock. They’re traded just like domestic stocks on U.S.-based exchanges, meaning you don’t need a special brokerage account to access them.
To help in your search for international funds, ETFs or stocks, check out www.magnifi.com.
You just type in a term like “international stock funds” and instantly get relevant, tailored results presented to you.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as May 10,, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.