Innovest Strategic Value Advisors, Inc.

New Alpha Source of Asset Managers: Environmentally Enhanced Investment Portfolios

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Courtesy of Innovest Strategic Value Advisors, Inc.

A major U.S. public pension fund (“The Client”) wanted to investigate
whether or not environmental and social (SRI) analysis can be used as part of
decision-making in its investment process without adverse impacts on its
portfolios’ risk-adjusted returns. To pursue this, the Client engaged Innovest
Strategic Value Advisors, Inc. (Innovest), an internationally recognized research
and analysis firm which, among other things, evaluates the environmental
performance of over 1200 large, publicly-held companies globally,
using its proprietary EcoValue21® ratings (EV21). See Appendix 1 for
background information on Innovest itself; additional information is available
at www.innovestgroup.com; see Appendix 2 for a detailed description
of the analytical methodology underpinning the EcoValue21® ratings.
Through Innovest, the Client is pursuing two initiatives. First, Innovest provides
its proprietary EcoValue21® environmental performance ratings to one
of the Client’s portfolio managers (“The Manager”) which in turn uses these
ratings as factor in its investment algorithm for an actual investment fund. In
this particular case Innovest’s signal accounts for approximately 20% of the
weight in this investment algorithm. The actual portfolio run by the Manager
using the Innovest overlay has out-performed its S&P 500 benchmark by
approximately 150 basis points since inception in March 2002.
Second, Innovest has applied the EcoValue21® ratings as an overlay to the
investment portfolios of six other money managers that the Client’s currently
uses. Innovest created a number of live simulations, or “shadow portfolios”,
to investigate possible uses and impacts of the ratings. The goal of this initiative
is to have a live simulation of the effects of Innovest ratings (rather than
a back test), to use actual portfolios, to apply actual current EV21 ratings, to
track performance, and to repeat the procedure during the course of one full
year. The Client wanted to answer two questions in particular: 1.What effect,
if any, does adding SRI considerations to an existing investment? 2. Which
investment styles, capitalization levels, and regional focus lend themselves to
an SRI overlay? This initiative is the subject of this report.

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