A return to 60/40 balance? [PODCAST]
This strategy fell out of favor, but it may be poised for a return.
This strategy fell out of favor, but it may be poised for a return.
While responsible investing has been around for a long time, in recent years the investing strategy has undergone many changes from available investing options to regulations to definitions of what responsible investing means.
Thrivent Asset Management (TAM) believes active management can produce favorable returns for our clients over the long term. Further, we believe success in active management depends on having skilled investment professionals, supported by rigorous investment processes.
TAM strives to take all relevant information into consideration when making investment decisions. Relevant information may include certain environmental, social and governance (ESG) criteria, which may be utilized and weighted differently by each portfolio manager and may be used to inform investment decisions. While ESG considerations may be applied in varying degrees by our portfolio managers and our non-ESG funds are not required to consider ESG factors, we believe that certain factors, when considered with a range of other financial criteria, have the potential to bolster returns and reduce investment risk.1
The principles underlying our responsible investment philosophy allow us to focus on creating long-term shareholder value, mitigating risks and investing in quality companies.
1. Financial materiality: Our responsible investment philosophy emphasizes financial impact, adhering to our philosophy of generating long-term shareholder value through meticulous selection of investments. TAM’s investment professionals may take material environmental, social and governance factors into account to the extent that they believe such factors impact long-term shareholder value.
2. Integration over exclusion: TAM does not take an exclusionary approach to responsible investing and does not avoid investing in certain industries solely based on industry classification. Rather, TAM’s investment professionals may choose to evaluate certain qualitative or non-financial factors and weight them based on their judgment as to what is most relevant for each specific company.
3. Investing in quality companies: TAM seeks to invest in enterprises that demonstrate solid financial performance, effective leadership and promising price potential and growth prospects. As long-term investors, we believe the integration of certain factors beyond traditional financial metrics—such as corporate governance—has long been an innate feature of a successful investment strategy, predating the industry’s adoption of the term ESG.
TAM provides both products that are not ESG-focused—which may consider ESG factors but are not required to do so, and ESG-focused products—which must consider ESG factors with greater prominence than other factors. For example, an ESG-focused product would give ESG factors greater prominence, similar to how growth-oriented products give greater prominence to growth factors and value-oriented products give greater prominence to value factors.
Our responsible investing philosophy statement covers all assets under management and is intended to provide a broad framework for assessing and incorporating various factors beyond traditional financial metrics into our investment analyses and decisions. Portfolio managers of our non-ESG funds are granted a range of discretion in emphasizing environmental, social and governance factors, with each investment evaluated on the significance of these factors to its financial performance.
Our philosophy encompasses a holistic view of the potential risks and opportunities associated with the environmental, social, governance and ethical dimensions of every investment. The specific approach to ESG integration utilized by our portfolio managers depends on multiple factors, including the objectives of the strategy, asset class and investment time horizon as well as the specific research and portfolio construction, philosophy and process utilized by the portfolio managers.
TAM incorporates various factors beyond traditional financial metrics—including ESG factors—to varying degrees across asset classes, including equity, fixed income and private assets. ESG factors may be employed in a variety of ways to target enhanced returns, mitigate risk and meet investment objectives within a portfolio. The approach to integrating these factors is determined by the specific investment process of the investment team within the underlying asset class. Certain portfolio offerings are not solely categorized as thematic or impact-focused; instead, they are curated with an emphasis on integrating comprehensive stakeholder value considerations with ethical and sustainable criteria that resonate with both ESG and faith-based perspectives.
Integration of material financial and non-financial factors into our investment process starts with the initial research as an investment idea is formed and continues through the life of the investment. The process of incorporating various factors beyond traditional financial metrics into our investment analyses and decisions takes place on two levels: first, with our research analysts as they identify investment opportunities and second, with the portfolio managers as they assess risk exposures at the portfolio level. The analysts and portfolio managers leverage in-house expertise as well as third-party data and research.
At one end of the responsible investing spectrum are screening approaches, which screen out (or in) companies based on specific non-fundamental criteria, including industry, products and ESG ratings. Screening approaches include negative and positive screening, which exclude or include companies based on defined ESG criteria. Screening approaches also include normative or values-based strategies—including biblically responsible investing, which exclude investments in companies that do not meet certain ethical or social criteria.
Next, there is ESG integration, which is a sophisticated strategy where ESG factors are incorporated into the investment decision-making process with the goal of mitigating risk and generating alpha.
After that are thematic approaches, which focus on specific environmental, social or governance themes.
Stewardship strategies are those in which the use of investor influence is used to protect and enhance long-term value for clients and beneficiaries.
Finally, there are impact strategies, in which investments are intended to generate a measurable environmental and/or social impact.
TAM and its affiliates currently have three sustainable investing products:
This fund is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:
The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund nontransparent, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. If other traders are able to copy or predict the fund’s investment strategy, however, this may hurt the fund’s performance.
For additional information regarding the unique attributes and risks of the fund, see the Principal Risks section of the prospectus.
Thrivent Small-Mid Cap ESG ETF (TSME)
This ETF looks to provide investors with consistent, competitive performance through favorable stock selection while monitoring risk. The ETF typically invests in a combination of small- and mid-sized companies across the growth and value spectrums. The management team looks for stocks that it determines have sustainable long-term business models and a demonstrated commitment to ESG policies, practices or outcomes. In certain limited circumstances, the ETF may also invest in companies with lower ESG ratings.
Thrivent ESG Index Portfolio (QTESGX)
Our ESG Index Portfolio offers passive exposure to companies with high ESG ratings and excludes companies that have products with negative social or environmental impacts, as determined by the index provider. The portfolio tracks the MSCI KLD 400 Social Index. This portfolio is available as an investment option through variable insurance products such as variable annuities and variable life insurance.
Thrivent Faith-Based Managed Portfolios
These model portfolios, built by TAM, are designed for investors looking to align their finances with how they live and what they believe by seeking to avoid investments in companies that may conflict with their values, such as those associated with gambling, adult entertainment, abortion and the manufacturing or distribution of alcohol and tobacco products. These portfolios are discretionary managed accounts that include investments from several Christian asset management firms that approach investment from a faith-based perspective.
Note that because ESG criteria exclude certain securities for non-investment reasons, investors may forgo some market opportunities available to those who do not screen for ESG attributes.
At TAM, we take our role as stewards of our clients’ capital very seriously. We strive to act in the best interest of our clients, whether we are managing funds, ETFs, managed accounts, or variable portfolios. To ensure we make informed proxy voting decisions, we have a dedicated ESG and proxy voting committee, chaired by the head of Thrivent Mutual Funds, that establishes our proxy voting policies and procedures. While we aim to vote on all proxy issues, there may be instances where it is not logistically feasible. Our decision-making is client-focused, seeking to positively impact the long-term performance and sustainability of investments we manage on behalf of our clients.
The committee also includes the chief investment strategist, head of fundamental equities, and director of equity research program administration, and is supported by an ESG specialist, responsible for overseeing TAM’s ESG program. The committee meets at least quarterly to review portfolio metrics and research coverage, relevant updates regarding high-profile ESG situations and areas of concern, as well as general ESG developments and topics.
As part of our ESG oversight process, we monitor, review and evaluate controversial issuers, activities and developments. The committee seeks to understand potential controversies more clearly and ensure that the potential risks are thoroughly considered. The committee also monitors changes in ESG conditions, regulatory developments and broader industry trends to prompt special review.
Active management: Active management, also known as active investing, is an investment strategy where a portfolio manager or investment team actively makes decisions about which securities to buy, sell or hold in a portfolio. The primary goal of active management is to outperform a specific benchmark index, such as the S&P 500 or the MSCI World Index, by selecting investments that the manager believes will generate higher returns than the benchmark. Active management involves continuous research, analysis, and monitoring of market trends, economic indicators, and individual company performance. Portfolio managers use various techniques, such as fundamental analysis, technical analysis and quantitative analysis, to identify investment opportunities and make informed decisions.
Biblically responsible investing: An investment approach that aligns with biblical values, excluding companies and industries that contradict Christian principles, such as those associated with abortion, gambling and adult entertainment.
Environmental, social and governance (ESG): An umbrella term and an acronym for environmental, social and governance, representing a framework for analyzing companies and countries to determine the impact of their operations on the environment, society and how they are governed.
Ethical criteria: Standards used to evaluate a company’s moral and ethical practices, including its commitment to honesty, integrity and social responsibility.
Faith-based perspective: A strategy where investment decisions are made in alignment with the religious, ethical and moral beliefs of an individual or group. Faith-based investing involves selecting or excluding investments based on religious principles, ensuring that the portfolio reflects the investors’ spiritual convictions alongside financial objectives. This approach may exclude companies associated with activities considered incompatible with the teachings of a particular faith, while favoring those that promote values and ethics upheld by that faith.
Financial materiality: The U.S. Securities and Exchange Commission (SEC) defines financial materiality as the significance of an item to users of a registrant's financial statements. A matter is considered “material” if there is a substantial likelihood that it is important to the reasonable investor. This concept recognizes that some matters, either individually or in aggregate, are important for the fair presentation of financial statements in conformity with generally accepted accounting principles (GAAP).
Impact investing: Investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return.
Negative screening: Screening is the application of rules based on defined criteria that determine whether an investment is permissible. Negative screening involves the exclusion of certain companies or sectors from an investment portfolio based on specific ESG or ethical criteria.
Normative (or values-based) screening: The investment approach that excludes companies not aligning with certain ethical, moral or social norms and values.
Positive screening: Screening is the application of rules based on defined criteria that determine whether an investment is permissible. Positive screening involves the inclusion of companies in an investment portfolio that meet or exceed defined ESG or ethical standards.
Responsible investing: An investment strategy that considers ESG factors and ethical criteria to generate long-term financial returns and positive societal impact.
Social criteria: Standards evaluating a company’s relationships and impacts on its employees, customers, communities and other stakeholders.
Stewardship: The use of investor rights and influence to protect and enhance overall long-term value for clients and beneficiaries, including the common economic, social and environmental assets on which their interests depend.
Sustainable criteria: Standards used to evaluate a company’s ability to operate in an environmentally, socially and governance-wise manner that ensures long-term business viability and positive societal impact.
Sustainable investing: The practice of investing in companies that promote environmental, social and governance practices that contribute to a sustainable economy and society.
Thematic: Selecting assets to access specified trends.
Traditional financial metrics: Traditional financial metrics are quantitative measures used by businesses and investors to evaluate a company’s financial performance, stability and profitability. These metrics are often derived from a company’s financial statements, including the income statement, balance sheet and cash flow statement.
1 TAM offers a diverse range of investment products, some of which are specifically ESG-focused while others are not. Our ESG-focused products are designed to prioritize ESG factors in their investment decision-making process. These products include Thrivent SMID Cap ESG ETF (TSME), Thrivent ESG Index Portfolio (QTESGX) and Thrivent Faith-Based Managed Portfolios. These specific products are mandated to integrate ESG considerations prominently, aligning with their stated investment objectives. TAM’s non-ESG-focused products may consider ESG factors, but such considerations are not a requirement or priority of the investment strategy.