Despite challenges of scale and liquidity, two funds – Christian Super and HESTA Super – are succeeding at impact investing, with different approaches.
Christian Super is among the few funds that focus on impact investing and use deep data analysis to hit investment targets. It serves 20,000 members and invests 8 per cent of its assets, or $62 million, in impact investments.
The fund’s chief investment officer, Tim Macready, says some impact investments have exceeded expectations while others have performed below them. But perhaps more importantly, Christian Super’s long-term view of “making money by doing good” makes impact investing integral to its overall strategy.
Macready recognises the immaturity of the market and a lack of liquidity within it, but says the fund’s data-driven approach helps diversify its portfolio, which protects its impact investments from market movements.
“There’s an acceptance here that if we want to be truly diversified, we have to do things with part of the portfolio that are a little different from others,” Macready says. “This predisposes us away from what everyone does and towards a more fundamental analysis of what the actual risks are in a particular investment.
“If we owned exactly what everyone else owned, and we were put under stress at the same time someone else is put under stress, then the performance of those assets would universally be very poor.”
Most of Christian Super’s partners in impact investing are development banks, which are philanthropic organisations with long investment horizons, and not heavily influenced by shifts in the market. Together with these collaborators, the fund’s investments help build community-based infrastructure such as housing, roads, railways and schools, typically in places where these things are lacking.
The fund’s investment team investigates the potential of a transaction in great detail and won’t proceed until it’s satisfied that all social and financial goals are met. More specifically, Christian Super replaces systematic factors such as interest rates, market sentiment or geopolitics with idiosyncratic factors like the performance of local economies, or the willingness of a local government to implement reforms.
“What we’ve tried to do is find assets that offer diversification, and where the other people around the table are long-term investors like us but without the same switching or member cashflow movement pressures that we have,” Macready explains. “Because there are so many different risks, it’s a very diversified risk portfolio.”
HESTA: guided by historical risk/return
More so than data, HESTA focuses on historical evidence of prior investments in its approach to impact investing. The fund looks at the return expectations in other areas of its portfolio to ensure its impact investments are suitable for the whole of the portfolio.
These investments, which include loans for affordable housing, disability accommodation and dementia-care facilities make up less than half a percent of total fund assets but are an important part of the overall strategy, HESTA general manager, unlisted investments, Andrew Major says.
“We’re able to compare the risk-return expectations we have in the broader portfolio with the risk-return equation in these impact investments,” he says. “We need to be satisfied that there’s a lot of equivalency between the two. There have been a number of opportunities we’ve said no to because we felt like the return wasn’t sufficient for the risk. So, we look at each opportunity on its merits.
“The first question for us is what’s the impact and form of investment and the second question is what’s the return and is it sufficient for the risk.”
Major adds that impact investing is challenging for most funds because it’s hard to find opportunities in an immature market that isn’t yet scalable. However, like Christian Super, he says that HESTA decided it was worth using a small part of its portfolio to invest in ways that can help provide bigger transactions, which are also more attractive to other participants in the market.
Major adds that all investments in the fund’s impact investment portfolio are performing to expectations.
In June, HESTA allocated a further $40 million to its Social Impact Investment Trust, on top of the initial $30 million it committed when the trust was established in 2015.