Building Impact Portfolios
Athena Capital Advisors LLC
The potential of impact investing is often illustrated in stories of individual investments. New entrants to the field and experienced participants alike are drawn to the idea of putting capital behind an inspiring social entrepreneur, an innovative business model, or a transformative technology. For investment advisors, the excitement over these kinds of one-off investment opportunities presents a dilemma: how to combine them into a portfolio that satisfies an investor’s impact objectives while also meeting the investor’s risk and return requirements?
Though finance is itself a relatively new field, it offers some guidance on how to approach this novel challenge. Modern Portfolio Theory (MPT), introduced by Harry Markowitz in 1952, gave investors a theoretical and mathematical toolkit for portfolio design.1 Investors instinctually understood the value of diversification, but until the arrival of MPT, they lacked a systematic process for constructing portfolios that could deliver the highest expected return for the least amount of risk.
MPT remains the foundation of the investment management industry today and offers impact investors a starting point when building portfolios that maximize both financial and “social” return for a given level of risk. Building Impact Portfolios is the second paper in a two-part series on impact investing. The first paper, Impact Investing: History and Opportunity, reviewed the wide range of impact investment strategies available across asset classes. This paper outlines a framework for blending those opportunities together into a coherent and comprehensive portfolio. It is geared towards institutional investors, such as foundation endowments, family offices and the firms that advise them. But any investor interested in moving beyond a deal-centric approach to impact investing and towards one that integrates impact throughout the investment process may find it useful.