According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.
In 1602, the Dutch East Indian Company issued the first shares of stock by a multinational company. The creation of stock and the pooling together of assets of smaller investors, fueled much of the industrial progress during the enlightenment period and beyond. Before stock, only governments or extremely wealthy families were able to build vessels, cathedrals, and other larger projects of scale.
The corporation later became designated as a person, and stock valuation became the determination of that hypothetical person’s worth. And in the creation of that avatar, we've often forgot that the corporation is not a single hypothetical person, but indeed is the totality of many real people. Multimillion dollar marketing budgets are now effective at hiding thousands of workers behind the veil of a brand. In spite of the singular attention of that one brand, it takes lots of people doing a hundred things right for a corporation to consistently perform at a high level. Thus, if the people behind a brand perform strong, the brand performs strong, and its stock performance will follow.
During the Great Depression, with the signing of the New Deal by Franklin D. Roosevelt, it was his investment in people that made him what many call the third greatest President, after Washington and Lincoln. His new deal investments in infrastructure, unemployment, and other systematic innovations of his time were ultimately investments in human assets. And that is why human-centered investments will always trump investments in artificial or hypothetical concepts. Because an idea is nothing without the effort of the people who manifest it into reality. Therefore, Socially Responsible Investments (SRI), such as Social Impact Bonds or Green Bonds present a timely opportunity to provide stability to a tumultuous market, and the following provides a few reasons why:
1) Market Volatility - The volatility of the stock market is partially as a result of the subjective reactions and valuations of the market. A financial vehicle whose value was determined by quantifiable outcomes, such as tax-payer cost savings, provide a more stable and objective way to transfer or measure the value of publicly offered financial instruments.
2) Per Capita Gains vs. Capital Gains - With stock there is something called Capital Gains. If you buy your stock and sell it, if the selling price is higher than the buying price after taxes, what’s left is called Capital Gains. The problem with capital gains is that they are determined wholly by the whims of the market. On Monday, August 24th of this year, the Chinese stock market lost over 30% of its value. With the returns of a social impact investment based on per capita outcomes, counting each person who meets the agreed criteria as a success, 1/3rd of a cohort of program beneficiaries would have to somehow exit the program in a single day to achieve a similar loss. Furthermore, in such cases, agreements would likely be set in place to provide for the replacement of program beneficiaries who choose to quit or are removed, chosen from a waiting list of other students within a few weeks of the student leaving the program, without counting the interim vacancy against the service provider.
3) Infrastructure Improvement - In the United States, according to Forbes, in 2013, 24.3% of U.S. bridges—64,000 in all—were identified as structurally deficient or functionally obsolete. Also, The Secretary of the Department of Transportation, Anthony Foxx, has been quoted as saying,
“…we need to build new things again. Our nation is growing by 70 million people over the next 30 years. That growth is coming largely in the south and western parts of the country. We will choke on our own growth if we’re not careful.”
Additionally, there must be a spending of funds that will go toward infrastructure improvements, such as the roads, which will save consumers millions of dollars in costs associated with car repairs and emergency visits as a result of car accidents caused by bad roads. The use of such creative financing will put needed and passive financing to work, also creating new jobs and spurring economic development, ultimately helping people.
4) Local Investment - Through the encouragement and empowerment of local communities, by providing them with the tools, resources, and technical assistance necessary to facilitate their own progression and transition, the efficient and effective use of resources is the result. There must be community-based tax-incentives to invest in social impact financial projects. With the purchase of traditional stocks, investment dollars often leave communities and in many cases fuel international operations. A tax-break for Socially Responsible Investments of 30%-50% at the State and Federal level would release immense amounts of capital and stimulate local economies, such as the tax-break for Early Childhood in Colorado.
5) Insurance - While banking account balances of up to $250k are insured by the FDIC, any investments in assets such as stocks, are not insulated from risk. If the company leadership fails to make the right decisions, the organization has the potential, like a Kodak, or taxi’s in the face of Uberization, to lose all value. Impact investments have the ability to become insured for losses, further buffering investors from market volatility.
There still remain questions concerning the future of the market. Look out in the coming years for a transitional acceleration in the attitudes and priorities of investors towards investments in people. We are always looking for great dialogue, so please share your thoughts!
Ean Garrett, J.D., is the author of two books, "Rebirth of a Dream" and "The Immovable Race", as well as the Chief Innovation Officer of the consulting firm, Infinite 8 Institute, L3C, specializing in the design and finance of social impact systems. Follow him on Twitter & IG: @eangarrett