Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
2. Impact investments: An emerging asset
class
Impact investments have begun to carve out a niche within the investment portfolios
of a wide range of investor types, but does that make them an asset class? We believe
it does based on an understanding of how the term “asset class” has come to be used.
We also argue that defining impact investments as an asset class within the
alternative investments space is most likely to lead to the growth of assets, as
observed in the cases of hedge funds, private equity and commodities. Recognizing
impact investment as an asset class will enable asset managers and investors to
develop unique skills to make and manage impact investments, organize around the
opportunity and develop standards and benchmarks to improve performance.
What makes an asset class?
CFA definition of an asset class and its limitations
Before we can address whether impact investments comprise an asset class, we must
define an asset class in general. The CFA Institute uses a definition that references
financial characteristics for a given set of assets 17 . An asset class will typically:
• Include a relatively homogeneous set of assets
• Be mutually exclusive
• Be diversifying
• As a group, make up a preponderance of worldwide investable wealth
• Have the capacity to absorb a significant fraction of an investor’s portfolio
without seriously affecting the portfolio’s liquidity
The CFA definition provides a good starting point for identifying why stocks and
bonds can be considered separate asset classes. However, there are several groups of
assets that are commonly referred to as asset classes that fail to meet the basic criteria
of this definition. Hedge funds, for example, are commonly referenced as an asset
class, but they constitute a group of investments that can range in character, from
fixed-income arbitrage to event-driven (single-stock) strategies. As such, hedge
funds are not homogeneous, nor would they be likely to exhibit low correlations to
the other asset classes (given they invest in them). Even though one would hesitate to
call hedge funds an asset class by the CFA definition, hedge funds are widely
considered to be an asset class. The same could be said for emerging markets or
commodities, both groups of assets for which the CFA definition would be difficult
to apply, particularly the homogeneity criterion. In fact, in our view, the perception
of being an asset class is as powerful as complying with the definition above, since
this perception is sufficient to drive capital flows into the sector.
Our indicators of an asset class
The indicators of an asset class become particularly useful for investments that have
yet to establish a significant history of financial data, such as impact investments. In
our view, an asset class requires the following:
17 Capital Market Expectations, Market Valuation, and Asset Allocation. CFA Program
Curriculum Volume 3, Level III. W Sharpe et al., 2011.
24