Money on the Move: Planned Changes in Impact Investors’ Allocations
Amit Bouri, managing director of the Global Impact Investing Network (GIIN) comments on possible changes in impact investment allocations. Abhilash Mudaliar, research manager and Hannah Schiff, senior research associate have also contributed to the article.
Impact investing—investing aimed at generating both social/environmental and financial returns—is a growing industry that is increasingly attracting new investors and approaches. A survey of 125 impact investors by J.P. Morgan and the Global Impact Investing Network shows that $46bn of invested capital was being managed by these investors at the end of 2013. The survey respondents committed a total of $10.6bn in 2013, with plans to grow this figure by 19 percent to $12.7bn in 2014. As the amount of capital flowing into impact investments increases, investors are also adjusting their portfolio allocations by responding to changing market dynamics and opportunities across a wide variety of sectors and regions.
Current impact investing portfolios are fairly well diversified across regions (see Figure 1), and investors plan to increase or maintain much of their current regional allocations as percentages of their overall impact investing portfolios (Figure 2).
The region to which the highest number of respondents plan to increase their exposure is Sub-Saharan Africa (29 investors), followed by East and Southeast Asia (18) and South Asia (14).
Sub-Saharan Africa is also the most popular region among the impact investors surveyed in terms of number of respondents with any part of their portfolio in the region, followed by Latin America (see Figure 1). The number of respondents that have investments in South Asia is nearly double that of those that have investments in Western, Northern, and Southern Europe.
Figure 1. Total AUM by geography
n = 124; AUM-weighted average; Total AUM = USD 46bn; Number of respondents with any allocation to each geography in parentheses
Source: GIIN, J.P. Morgan.
Figure 2. Change of allocation planned for 2014, by geography
Number of respondents that responded for each region is shown next to each bar; Ranking by number of respondents who chose “increase”
Among the many reasons for increasing allocations to these regions is the desire to align opportunities more closely with investment mandates. The Dutch development bank FMO is one example. As FMO Director Huib-Jan de Ruijter noted:Source: GIIN, J.P. Morgan.
FMO is focused on creating impact in the poorest countries of the world. Because of this, we plan to increase our investment in Sub-Saharan Africa and South Asia over the next few years and to place a lesser emphasis on regions with mostly middle-income countries, such as Latin America and Eastern Europe.
Additionally, some respondents also see strong potential for viable investment opportunities in the region. According to Oliver Karius, partner at LGT Ventures Philanthropy:
Improving food security as well as contributing to sustainable agricultural development through scalable, local organizations in sub-Saharan Africa and Asia is one of the focus sectors where our clients engage alongside us. There are a growing number of viable, socially-valuable businesses in these regions, and we see great potential for creating positive impact.
Investors reported that the largest portions of their assets under management (AUM) are in microfinance and other financial services (21% in each), energy (18%), and housing (11%), with smaller allocations to food and agriculture, healthcare, information and communication technologies (ICT), education, and water and sanitation (see Figure 3). Interestingly, although food and agriculture and healthcare account for 8% and 6% of AUM, they are the first and third most popular sectors in terms of number of investors with any allocation.
Most of these sectors received a high number of respondents planning to increase or maintain their allocations (see Figure 4).
Figure 3. Total AUM by sector
n = 124; AUM-weighted average; Total AUM = USD 46bn; Number of respondents with any allocation to each sector in parentheses
Source: GIIN, J.P. Morgan.
Figure 4. Change of allocation planned for 2014, by sector
Number of respondents that responded for each sector is shown next to each bar; Ranking by number of respondents who chose “increase”
One of the more notable observations here is the fact that 11 respondents plan to decrease their allocations to microfinance in 2014. This might reflect diversification strategies, given that microfinance currently represents the largest part of the total assets under management with 21%, and is even higher among these 11 respondents, at 38% of current portfolios.Source: GIIN, J.P. Morgan.
Many investors are bullish about prospects in food and agriculture, healthcare, and financial services (excluding microfinance). Out of the 66 investors reporting on planned changes in allocations to food and agriculture, 33 plan to increase their exposure to that sector in 2014.
Adobe Capital, an impact investor in Mexico, points to potential in agricultural companies focused on organic produce for both domestic and export markets. Mexico itself is a promising country—as Adobe Capital puts it.
Mexico is well-poised to be a relevant player in agriculture, especially in the organics industry. The country is one of the largest producers and exporters in the world of organic products. For one thing, it has favorable conditions to harvest chemical-free products. For another, it is well positioned for the international trade of these, being geographically close to one of the largest markets in the world (the US) and having favorable international trade treaties with a variety of countries in the world, including the EU. That said, work still must be done to develop attractive companies to invest in that combine a scalable business model and target an attractive market.
Despite its relatively nascent stage, the impact investing market today shows dynamism, with investors actively exploring ways to diversify their holdings. As do mainstream investors, impact investors also continuously adjust their portfolio allocations in response to market opportunities, strategic considerations and organization-specific drivers. These planned changes give us a sense for certain potential trends in the global impact investing industry. It will be interesting to compare actual changes to these planned changes after 12 months, and we look forward to doing so as part of next year’s survey