Investing Science

Advancements in technology have paved the way for analysis of hundreds of thousands of data points relating to stock market returns. From this analysis, patterns have emerged. These patterns clearly show that, since 1928, certain types of risk premiums have rewarded investors.

Analysis shows that market portfolios that emphasize or tilt toward small and value companies have delivered returns above the market itself. Understanding that risk and return go hand-in-hand, investing science reveals diversification and specific risk exposures can lead to higher expected risk-adjusted returns.

These important advancements in investing science, coupled with the analytics that enable a company to quantify their environmental impact have led to what IFA Sustainable believes is a convergence of optimized returns and sustainable values.

Looking Back for a Better Future:

The investment strategy that is the backbone of the IFA Sustainability Index Portfolios emanates from research indexes developed at the Center for Research in Security Prices (CRSP) at the University of Chicago. Established in 1960, CRSP serves as a database of total returns, dividends and price changes for all common stocks listed on the New York Stock Exchange from 1926 to the present. With its establishment, CRSP has led to research that has redefined how investors think about their portfolio and the capital markets at large.

One of the first pioneers in financial economics was Professor and Nobel Laureate Harry Markowitz. He was the first to offer a comprehensive study about risk and return and present a way that portfolios should be selected based on this criteria (1952). This work provided the foundation for the works of Professors and Nobel Laureates William Sharpe and Merton Miller for the Capital Asset Pricing Model (CAPM) and theory of capital structure, respectively. Together, their body of work is referred to as Modern Portfolio Theory (MPT) (1990).

In 1992, Professors Eugene Fama from the University of Chicago and Kenneth French from Dartmouth College published an empirical study about the cross section of expected equity returns, thus expanding on Professor William Sharpe's CAPM model. Alongside Beta (market risk), size and book-to-market factors have also been considered determinants in the expected return of equities.

Sustainability Ratings System:

IFA's Sustainable's strategy originates from Sustainable Holdings, an organization committed to creating a data-driven methodology to effectively capture the sustainable practices of major corporations. The rating system is based on key aspects of the environmental sustainability of a company. These variables emerged from an in-depth analysis of the business-environment interface, data availability, and a model of the drivers of environmental performance. The model builds on the extensive sustainability experience of the Sustainable Holdings team, research by Esty Environmental Partners, and the Advisory Board's wide-ranging knowledge of the academic research in the corporate sustainability field. Portfolio weightings will weigh heavily companies that reflect strong ratings, while systematically underweighting or eliminating those that reflect vulnerability or climate change weakness.

IFA Sustainable's Index Portfolios are built in accordance with Nobel Prize winning research and evidence-based analysis of long-term data, enabling participants to invest with a high degree of confidence. Additionally, we provide broad asset class exposure, risk appropriate allocations, and tilting towards companies that are leading the effort in becoming more sustainable within their respective industries.