Demand grows for student-led impact investment funds - Financial Times (2024)

Katie Wheeler applied to the University of Michigan to study how private-sector approaches could be deployed in the public sector, but ended up with far more than classroom-based learning. She was soon shaking up a $500,000 student-run fund to scrutinise the effectiveness of the social enterprises in which it invests.

Ms Wheeler is one of a growing number of students seeking ways to make an impact while they are learning — acquiring practical skills in line with their personal values and which they can apply in their professional lives.

“Action-based learning of the best kind” is how Ms Wheeler describes the Ross School of Business’s pioneering Social Venture Fund. Upon graduation, she hopes to work for an investor or developer in affordable housing. “I’m interested in cross-sector collaboration andinnovative ways to finance equitable development,” she says.

Kurt Buchbinder’s passion is for the environment. After five years at bond group Pimco, he opted for an MBA at Tuck Business School at Dartmouth, to pursue what he calls a “more impact-oriented career”. The Californian says: “I feel strongly about ocean conservation as well as water-saving technologies since California is perennially in a drought.”

The course appealed to him because the school operates multiple student-managed social impact funds. With fellow students and faculty, he has since launched the Tuck ESG Fund, which uses environmental, social and governance (ESG) factors in deciding how its managers will invest $100,000.

Like the University of Michigan, Tuck’s student-led experiential projects have three characteristics: a focus on financial as well as social returns; integration into the curriculum; and a breadth of approaches to help develop different skills.

“To equip the next generation of investment professionals who can credibly assess ESG risk/opportunities . . . it’s increasingly important to offer the full spectrum of learning across asset classes, representing more of a total portfolio approach to sustainable investing,” says John McKinley, Tuck’s executive director of the Center for Business, Government and Society.

Some funds offer venture capital for early-stage companies, while others focus on investing in equities or bonds. St Xavier University in Chicago oversees the Cougar Student Managed Hedge Fund, part of an undergraduate derivatives course in its Graham School of Management.

The Sustainable & Impact Investing Learning and Knowledge (Siilk) network alone includes more than 40 active student-managed investment funds, primarily in the US, with a focus on responsible investment.

“We see a lot of enthusiasm,” says Georges Dyer, executive director of the Intentional Endowments Network, which encourages university endowments to switch to more sustainable investments, and created Siilk to promote student-led funds and sustainability in school curriculums. and investor activism.

While some student funds are supported by a benefactor or donations from students, others manage a share of their university endowment directly. Examples include the Sustainable Investment Fund at Haas school of business at the University of Berkeley, and Desautels Capital Management Socially Responsible Investment fund at McGill in Montreal.

Some projects such as Wharton’s Impact Venture Associates prepare investment cases and then seek external support through crowdfunding, while others have formed partnerships with external funds.

Another option is the Turner MBA Impact Investing Network and Training (Miint) competition, which gets students to pitch for a $50,000 investment. Brian Trelstad, an impact investor who helps oversee it, says: “We provide the one-stop shop. Many schools have their own funds but have found real value in attending the competition to sharpen their saw against others.”

There are two problems in the expansion of such initiatives. The first, as he concedes, is that “the demand for impact investing jobs currently vastly exceeds the supply”.

That inspired Steven Petterson, a graduate of the University of British Columbia, to follow his passion by founding the National Social Value Fund, which raises money and uses students at universities across Canada to identify and invest in local “social purpose” businesses.

The second is that business schools are not the only source of demand. New York University’s Impact Investment Fund draws on students from business, public service and law schools. It backed Sapient Industries, which uses machine learning to improve electrical grid efficiency, and has itself been deployed on campus to reduce carbon footprint.

At the extreme, Mr Petterson has resolved to work only with undergraduates. “There’s a lot less ego and they are much more intentional,” he says. “One professor even said they even outperform the MBAs. We don’t want everyone just coming from business or they talk exactly the same.”

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A veteran wealth management executive says that unless Canada’s largest pension plans start investing more domestically, institutions like the Toronto Stock Exchange could one day fall by the wayside.

Peter Letko, co-founder and partner at investment management firm Letko Brosseau, told BNN Bloomberg that Canada’s economic and financial health is being impacted by the low level of investment from Canadian pension funds.

“I don’t think this is good for our economy. It’s certainly not good for our financial markets,” he said in a Friday morning television interview.

“Do we want to see a great institution that has served us well like the TSX and other exchanges in Canada just disappear or wind into the Nasdaq or the New York Stock Exchange? I think it’s important that we control our capital and direct our capital to the benefit of Canadians as a whole.”

Letko said that without more investment from Canada’s largest savings pool, the exchange’s importance could diminish over time. His comments came a day after the TSX marked a full year without a new public offering.

“Will we need it? Will we need all the individuals that are involved and regulate it? We might as well wind all that up and just become part of the Nasdaq,” he said.

“I don’t think that’s what Canadians would wish and that’s certainly not what we would wish.”

Open letter to Freeland

On Wednesday, Letko and his firm spearheaded the writing of an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to “amend the rules governing pension funds to encourage them to invest in Canada.”

The letter, also published as an advertisem*nt in several major newspapers, included signatures from nearly 100 business leaders, including Rogers CEO Tony Staffieri and Canaccord Genuity Group CEO Dan Daviau.

“We thought that it would be helpful to hear the voices of some of the most successful people in the country; some of the wisest business leaders,” Letko said.

“And by the way, they’re not just business leaders that have signed, they’re union leaders too, so we thought this would be helpful to move this dialogue forward.”

The letter claims that Canada’s pension funds, which represent nearly 40 per cent of the country’s institutional savings, have over the years reduced their holding of public Canadian companies from 28 per cent in 2000 to less than four per cent at the end of last year.

“It is estimated that the eight largest pension funds in Canada have more invested in China (roughly $88 billion) than they do in Canadian public and private equities (roughly $81 billion),” the letter said.

Canada a ‘wonderful’ place to invest: Letko

Letko said that he doesn’t want to limit the ability of pension funds to seek investing opportunities around the world, but said that the lack of investment in Canadian companies is negatively impacting returns.

“We agree with investing around the world and we believe that pension funds should be allowed to invest wherever and in whatever quantities they wish, we are not restricting that,” he said.

“What we’re concerned about is that there’s not enough being invested here in Canada… it is not an effort in getting the best possible returns.”

Letko said that historically, Canada has been a “wonderful” country to invest in, both for institutional and private investors.

“If you look at the last 25 years comparing Canadian returns to the G7, we’re on top, and if you look at it over 100 years, the returns have been very, very respectable,” he said.

“Canada has got lots of global champions… that have enjoyed wonderful growth and are being completely ignored by our biggest pool of capital.”

With files from Bloomberg News

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Keith Ambachtsheer is director emeritus of the International Centre for Pension Management (ICPM), senior fellow of the National Institute on Ageing, executive-in-residence at the Rotman School of Management and co-founder of CEM Benchmarking and KPA Advisory Services.

Sebastien Betermier is associate professor of finance at McGill University’s Desautels Faculty of Management and the executive director of ICPM. The views of the authors do not necessarily represent those of ICPM.

In a highly publicized open letter to the Canadian government, a group of business leaders have opined that Canadian pension funds are not investing enough in Canada and that this is hurting the Canadian economy.

Their opinion contradicts a well-established empirical fact in academic research showing Canadian pension funds and other investors allocate a disproportionately large portion of their portfolio to domestic assets, such that it has been termed as the “home bias.”

Even though Canada makes up approximately 3 per cent of the global stock market index, large Canadian pension funds invest about 20 per cent of their listed equity portfolio in domestic firms. That extra 17 per cent is the “home bias.” Therefore, Canada’s leaders must examine the issue carefully before taking any policy action, such as amending the rules governing pension funds to push them to invest even more in Canada, as the open letter proposes.

Finance academics, who have long studied the topic of domestic investments, have been scratching their heads over this “home bias” and why investors tilt their portfolio toward domestic assets. Such a disproportionate tilt is risky, especially when the local economy is comparatively small and concentrated in a few industries.

Consider that Canada’s GDP is comparable to that of Texas and heavily driven by the natural resource sector. To avoid the proverbial “all eggs in one basket” scenario of concentrated risk, our pension funds choose to invest in a highly diversified and global portfolio of companies to spread out the risk so that if one investment fails, the others will be there to buffer the loss. So, by investing globally, outside of Canada, the funds are able to decrease the risks in their portfolio and, in turn, provide greater retirement security for their millions of members and reduce the cost for the government in cases of severe losses requiring government financial intervention.

On the other hand, domestic assets do bring distinct benefits to investors which may be the reason we see this “home bias.” For one, domestic investments are relatively effective for hedging local interest rate and inflation risks. Additionally, pension funds have a home-court informational advantage which can result in high risk-adjusted returns for their domestic investments. Over the past 20 years, Canadian pension funds have not hesitated to go big on strategic domestic investments and make use of their superior information at home.

For example, in 2000 Ontario Teachers’ Pension Plan acquired Cadillac Fairview – a large owner, operator, investor and developer of best-in-class real estate primarily located in Canada. The $6-billion transaction represented close to 10 per cent of the fund’s $67-billion of assets under management at the time. The acquisition of Cadillac Fairview has allowed Ontario Teachers’ to create and capture significant value while retaining talent in Canada.

What is clear from this discussion is that 1) the risk-return trade-offs of domestic investments are complicated and need to be carefully assessed; 2) the 20-per-cent allocation to Canadian assets by our pension funds represents a considered strategic balancing of these trade-offs; and 3) we should not rush to conclusions about any policy measures proposed by the open letter.

If capital is not flowing into Canada, as the business leaders say, then the underlying issues could be structural and have to do with barriers to investing. Nothing discourages investment more than an uncertain policy environment which makes it difficult for long-term investors to commit large amounts of capital to Canadian ventures.

For example, let’s look at infrastructure. Assets such as toll roads have appealing properties for pension funds because they provide a steady and indexed stream of cash flows. But an uncertain policy environment makes such infrastructure investments high risk for the funds. The recent legislation introduced by the Ontario government to ban tolls illustrates the kind of policy risk pension funds are exposed to. If they had already invested in road infrastructure, they would lose their return on investment, which means a loss in retirees’ pensions.

The question we should ask ourselves is not whether Canadian pension funds invest enough in Canada, but instead how we can make Canadian assets more appealing to investors. Reducing the barriers to investing in Canada will unlock capital not only from our own pension funds but also from a much larger pool of international investors.

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