Thoughtfully incorporate impact funds into your portfolio allocation
Interest in impact investing is growing. Yet, investors typically allocate to impact funds independently from their traditional assets, foregoing diversification benefits. Since returns from impact funds correlate with traditional asset returns, taking such correlations into account allows for better portfolio diversification.
Our 3D Optimiser for Impact Funds brings together impact funds and traditional assets in an efficient portfolio allocation that maximises impact without financial sacrifice.
Input your minimum allocation to impact funds alongside your traditional assets, and define their parameters:
[Inputs for traditional assets can be by asset class or broken down to the underlying managers (funds, ETFs or managed strategies). For illustrative purposes, we have pre-populated with sample asset classes and a minimum allocation of 10% to impact funds, split ¼ to impact private debt and ¾ to impact private equity. Click the toggle on the right to remove the position from the optimisation process. Click the pencil to update input parameters and click the plus sign to add your own portfolio holdings.]
Your minimum allocation to impact funds is ((total_fixed_impact))%
With a traditional carve-out for impact funds
We use total allocation to impact funds as a proxy for portfolio impact.
Using the optimiser to find the best trade-off between risk, return and impact involves four steps:
1. Input the expected return and risk of your portfolio holdings
You can either:
You can modify the portfolio holdings’ expected risk and return.
You can decide to include or not certain portfolio holdings with the toggle .
Specify the expected return, risk and correlations with other portfolio holdings.
Indicate whether the new portfolio holding is an impact fund or not via the toggle icon Is an impact fund?
Click the Save button to store the portfolio holding’s characteristics.
2. Define your preferred minimum allocation to impact funds
In the input table, you can modify your minimum allocation to impact funds. By default, the minimum allocation (weight) to impact funds is 10%.
3. Define your optimisation approach
You can choose among four different optimisation processes:
The technical appendix describes the different optimisation processes.
You can also choose your preferred level of risk aversion: Low, Medium or High [see technical appendix for a definition]. By default, the optimisation tool assumes a medium risk aversion.
4. Visualise the optimal portfolio
The pie chart shows your optimal portfolio (in %). The tool also shows your optimal portfolio’s risk, expected return and impact allocation.
We could easily adapt our 3D optimiser for climate to any impact variable that is (or could be) available for any firm. Yet, some impact funds target variables that are not relevant for commercial firms (e.g., access to drinkable water, the recidivism rate of former prisoners, etc.). Hence, we need a different type of 3D portfolio optimiser for impact funds.
First, we need to define a proxy for impact at the portfolio level. We use total allocation to impact funds.
Second, we need to assess how impact funds correlate with standard assets.
Then, our optimiser allows to find optimal trade-offs between risk, expected return and impact.
More precisely, the tool can compare four allocations:
By default, the optimiser uses six pre-defined portfolio holdings: Public Equity, Bonds, Private Equity, Private Debt, Impact Private Equity and Impact Private Debt. The paper below discusses how we estimate correlations between portfolio holdings.
Our paper in the Journal of Impact and ESG Investing describes the optimiser in greater detail.