Seattle-based SNW Asset Management, an independent RIA that provides active fixed-income portfolio management and has approximately $1.7 billion in assets under management, had to think on its feet last year when some advisors began to push for impact investing-focused bond portfolios.
Part of the problem is that few bond portfolios are packaged or even assessed using impact criteria. In addition, credit ratings from Standard & Poor’s, Moody’s and Fitch Ratings fail to address social and environmental impacts that could affect future financial performance. For example, AA or A-rated bonds issued to a coal-burning power plant might not price in the risks of pollution or negative health outcomes.
But everything clicked when a mutual client introduced SNW Asset Management to HIP Investor Inc., a San Francisco-based firm that rates more than 4,000 companies globally for impact and advises on more than $120 million in assets. Initially, the firms partnered to rate 200 municipal bond issuers. That number has grown to 500 and keeps expanding. In early 2013, they began offering custom impact-rated bond portfolios.
“We dug in last fall and launched in January,” says Eddie Bernhardt, president and CEO of SNW Asset Management. “We saw a big, wide-open space in the market.”
As of August, the SNW HIP-rated bond portfolios totaled $70 million in assets. Eighty percent of that amount comprised tax-free municipal bonds, with the remainder split among government and corporate bonds (7.5 percent each) and taxable municipal bonds (5 percent).
SNW’s credit team, which vets the credit quality of each issue, applies HIP’s impact ratings as part of its fundamental credit analysis. The HIP Scorecard rates issuers on a scale of zero to 100 based on health, wealth, earth, equality and trust factors. The midpoint, 50, signifies a net positive benefit to society, says R. Paul Herman, CEO of HIP Investor.
Issuers are divided into eight broad categories: education; health care; water and waste water utilities; energy utilities; cities, counties and states; transportation, ports and airports; U.S. Treasuries; and agency debt.
“No other provider in fixed income looks at bonds in this depth,” says Herman, who describes it as “quantitative, measurable results with a mission.” Advisors typically ask SNW to select either the highest HIP-rated bonds available; a mix of bonds that average a designated HIP score; or a theme that interests a client such as education, environment, health outcomes or sustainable cities.
SNW does not have a long enough track record of accounts managed in the HIP strategy to have Global Investment Performance Standards compliant composites, says Bernhardt. GIPS is a set of standardized, industry-wide ethical principles that guide investment firms on how to calculate and report their investment results to prospective clients.
“That said, for HIP-rated bond portfolios we currently manage, investors earn roughly the same yields as non-impact rated bond accounts and we expect long-term performance to be very similar as well,” he says.