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Value, Added

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Welcome to November!

This week we’re witnessing what it’s like to come down from a sugar high, and we don’t mean the post-trick-or-treating crash. After explosive growth over the past two years, the tech industry is slowing down like a kid two hours after a candy binge. As Morningstar highlights, the rising dollar, falling consumer spending, sluggish digital ad growth, and a murky outlook for cloud computing are all hurting big tech earnings. And the slowdown isn’t isolated to tech behemoths; the startup sector also seems to be sobering up after a party, as the New York Times described last weekend.

You might be feeling the impact of the sugar crash in your own portfolio, since many sustainable and ESG funds are heavily weighted toward growth stocks like tech companies. Sprinkling in some stable value stocks can help create a healthier balance — and there are ways to do it without sacrificing your values. We’ve got more on that below.

One thing that’s not crashing? Interest rates. Yesterday the US Federal Reserve hiked interest rates by another .75%. That’s unwelcome news for homebuyers, who are already facing the highest mortgage rates in two decades. The Fed signaled that it plans to continue raising rates in the coming months in its attempt to control inflation, though hinted that future increases could be smaller.

Trying to figure out how to cope? The Wall Street Journal suggests some strategies for dealing with rate hikes. Among them — enjoy the benefits of higher rates by ratcheting up your savings. If you’re shopping around for a high-yield savings account, we’ve got some tips to find your “yield of dreams.” Finally, remember to turn your clock back and enjoy your extra hour of sleep on Sunday — you deserve it!

News you can use

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  • Nearly three-quarters of S&P 500 companies now tie executive compensation to some form of ESG performance. That’s according to a new report from The Conference Board, which found growing links between exec pay and goals related to diversity, carbon footprint and emission reductions.
  • Only 15% of Americans have a good understanding of ESG, finds a new survey. Yet despite being unfamiliar with the elusive acronym, over 75% agree that companies have a responsibility to behave as good citizens and consider their impacts on the planet, and 40% would be willing to accept lower return on investment in companies with stronger ESG performance. So maybe [share FWIW with your friends] to spread the word about sustainable and values-aligned investing 😉.
  • Global consumer goods giants are probably going to miss ambitious targets to reduce plastic pollution by 2025, says a new report from the Ellen MacArthur Foundation and UN Environment Programme. Achieving 100% reusable, recyclable, or compostable packaging by 2025 is unlikely for most of the over 500 companies that had committed to it. Together the brands are 65.4% of the way there, representing 20% of all plastic packaging produced. While collective first-use plastic is actually increasing, the good news is the use of recycled content in packaging has doubled from 4.8% in 2018 to 10% in 2021.You can check how much progress individual companies have made on several metrics here and read more about investing on this issue here.

Valuing your values

Small buildings with arrows up next to them (and plus signs) and large buildings with arrows pointing down next to them.

Does the rough economy have you evaluating your values? We’re big fans of incorporating your values aka your principles and beliefs into your investing. But we’re also thinking about the worth or price value of values-based portfolios. How can you maintain your values and best ride out this rocky period? We look into what the experts are saying and into the growing importance of value stocks, but first you should know about…

The growth and value seesaw

Unless you’ve avoided the news cycle for the last six months — in which case, who could blame you — you know that stock markets have reacted badly to high inflation, rising interest rates, and predictions of a recession. High-flying technology stocks, like the venerable FAANG group (Facebook, Apple, Amazon, Netflix, and Google/Alphabet) or smaller companies developing new innovations, have been crushed as investors expect their once jumping profits to slow down. And we’re already seeing signs they have.

On the other hand, shares in the less exciting giants that sell essentials like toothpaste and chicken nuggets, have tried and tested business models, and report stable earnings, are the ones that have fared relatively better. S&P 500 firms in the consumer staples, utilities, and health care sectors are down less than 10% this year, doing much better than those in say consumer discretionary, communication services, or information technology, many of which are down 20-25% since January. Energy stocks (oil & gas, coal, etc.) are actually up over 60%. You’ll notice that instead of praising moon shots, more and more Wall Street analysts these days are identifying “recession-proof” companies.

These are called “value stocks.” They are companies whose stock is trading below the value of their fundamentals (sales, earnings, dividends, etc.). In the present market, many have core businesses that have more consistency and, thus, got less attention in the last few years. They’re considered underpriced by many investors as they did not enjoy as large a price runup in the last few years yet financial analysts now think they are well positioned for the coming months despite the economic turmoil. Many value stocks also come with dividends, which is in demand now as people seek additional regular income to keep up with rising prices. The opposite of a value stock is a “growth” stock. These are promising companies that could see stellar profit growth in the future but their business plans have higher risk and a higher likelihood of being derailed by the current economic environment.

💡: Looking up a fund on Yahoo Finance and clicking the “Profile” tab will tell you whether it falls in the value, blend or growth category.

How does this affect you as a sustainable investor?

First, the bad news. Many sustainable funds tend to have a bias towards the “growth” stocks — many of the same stocks that are having a bumpier ride as interest rates have been pushed higher in the US and around the world. Almost 70% of large-cap sustainable funds that contain a combination of both growth and value stocks tilt more toward the growth side, according to Morningstar.

Younger, growth companies have been better at meeting key requirements to qualify for inclusion in sustainable and ESG strategy funds and the drive to avoid fossil fuel related shares has also impacted the returns of these funds. “If you exclude hydrocarbons or heavy industry, you’re going to tend to skew more growthy,” said Aaron S. Dunn, a fund manager at Morgan Stanley to The New York Times. Sustainable funds focused on clean tech and other new innovations to help the environment and society also naturally lean towards growth. This was great for sustainable investors when growth was performing better than value, a trend that lasted over a decade until the end of 2021. But it’s far from ideal now.

The good news is you don’t have to sacrifice performance for your values if you take a more nuanced perspective and remember one of the core tenets of investing to protect your returns — diversification. To adjust your holdings to embrace both your values and value while always keeping an eye on avoiding market timing and focusing on the long-term, financial experts are pointing out that you can choose sustainable funds designed to be balanced with value and growth stocks or those that focus more on value

The New York Times recently mentioned a few such sustainable funds, including Vanguard Global ESG Select Stock Fund, Calvert Focused Value Fund, Parnassus Endeavor Fund, Nuveen ESG Large-Cap Value ETF, Calvert U.S. Large-Cap Value Responsible Index Fund, and the Northern U.S. Quality ESG Fund. In addition, a number of traditional value funds hold stocks that are in many sustainability-focused portfolios without claiming the ESG or sustainable mantle. For example, the Oakmark Investor Fund, which is included in Morningstar’s list of top value funds, includes Alphabet, KKR, and Charles Schwab, three stocks found in many funds with “responsible” or “sustainable” in their titles, in its top 10 holdings.

You can also look for value stocks from companies showing strong improvement in the issues you prioritize. As sustainability, diversity and governance issues have come to the fore, real progress is being made in firms that you may have overlooked. Looking at recent reports, rankings and ESG ratings can help you identify the candidates making good progress and leading the sustainability movement in industries that are difficult to reform or marked by poor practices. These companies due to their large size, influence or sector can have a major positive impact.

Examples, please! Ok, here are two: Coca-Cola has made progress on their commitment to reduce plastic pollution while also consistently sending shareholders quarterly dividends; and UnitedHealth Group has committed $100 million to diversify their workforce. If these are issues you prioritize, these value stocks might be worth keeping an eye on. And to start your research, we suggest looking at public sites from MSCI, Sustainalytics, and S&P500 (scroll to the bottom of the page) where you can look up ESG ratings by stock. For example, looking up UnitedHealth Group on the Sustainalytics site shows a low ESG risk (yes, in this case, low is good).

Regardless of how you approach your allocations, remember that the market turmoil should not take your eye off the benefits (both mental and, from a historical perspective, financial) of a longer-term perspective and remember that our favorite financial experts also remind us to make sure we never end up overexposed to a single company. Experts say this is when a stock makes up 5%-10% of your portfolio.

Before you go -

The latest and surprising application for AI: finding perfectly ripe avocados for your guacamole.

** FWIW team members own shares of Alphabet, Apple, Charles Schwab, Coca-Cola, and UnitedHealth Group.

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