A Comparison of Historical Performance
Many investors like the idea of putting their wealth to work in ways that can make the world a better place — or at the very least, cause it less harm. But does social investing come at the cost of lower returns?
Let’s take a look. There are only a couple indexes available that focus on companies with favorable environmental, social and governance (ESG) ratings. ESG criteria includes a comprehensive assessment of long-term economic, environmental and social factors, including climate change strategies, energy consumption and human resources development. The MSCI KLD 400 Social Index is an EFT that provides exposure to these kind of companies.
This chart compare the KLD 400 Social Index to the S&P 500 Index, which is large cap index that does not take into account ESG criteria.
As you can see for many years the returns looked pretty similar but since 2010 they have been diverging significantly. The annualized 10-year return through September 2016 of the MSCI KLD400 is 5.12% vs. 7.20% for the S&P500. A difference of greater than 2% is huge — with the broader market outperforming the social index by 40%.
A Better Way
For some investors a lower return is more than justified by the fact that their money is invested in companies that are aligned with positive environmental, social, and governance (ESG) practices. For many others, doing good is great as long as it doesn’t mean sacrificing returns. And for most of these people a 40% difference is a deal-breaker.
At OpenPath Investments our approach to social impact investing has delivered positive outcomes for people (working-class families) and the planet while delivering market-beating results and profits for our investors.
While the S&P 500 recorded an annualized return of 7.20% over the last 10 years, OpenPath’s averaged a 33% IRR over that same time. (This pertains to the 8 properties we acquired and sold over this period.) The average hold was 2.7 years and the average multiple on equity was 2.0X.
Do we expect to see these kind of results going forward? To be sure, the last 10-years have been good for real estate in general. At OpenPath our model of acquiring work-force housing in inventory constrained markets and then adding value to the properties and community for the residents has optimized the broader opportunities in real estate investing. Over the next 10 years, we’d be thrilled to match our returns from the last 10 — but we don’t plan for that. We’d stress that investors set more realistic expectations as well. Going forward, we expect that new OpenPath opportunities will deliver a preferred annual return in the ~6–8% range and ~14–15% IRR. These kind of returns would still far exceed the recent returns from the Dow and S&P as well as even the most optimistic projections for these stock indexes. The above OpenPath projections are general and subject to change based on the information we have at the time of any specific investment. As always, we will provide more details on pro forma projections of specific opportunities/properties as these come available. And our property-specific investment structure (we don’t use a fund structure) gives investors the ability to decide wether or not to invest in any given opportunity based on the particulars at that time.
Doing good socially and environmentally while doing well financially can be a real challenge when investing in the stock market. OpenPath social impact real estate investing offers investors a better way.
If you’re you interested in learning more about OpenPath Investments and our social impact model this video provides a great overview.
As always, let me know if you have questions or would like to discuss. You can reach me at David at OpenPathInvestments.com
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