Impact investment funds and the equity market: correlation, performance, risk and diversification effects – A global overview

Abstract

The aim of this paper is threefold. (1) To examine the financial performance of impact investment funds relative to the MSCI World Equity Index as well as traditional asset classes in major developed and emerging economies. (2) To assess the correlation between impact funds and traditional asset classes to see if there are diversification benefits. And finally, to examine the portfolio effects of including impact investment funds in a portfolio with traditional asset classes using mean variance optimization (MVO), capital asset pricing model (CAPM) and Black Litterman (BL) model. The study found that impact investment funds in both developed and emerging market economies deliver financial returns in line with and above the equity market. Broadly there was a negative or low correlation between impact investment funds and conventional asset classes (equities, bonds and cash). This bodes well for portfolio diversification. On comparing the performance of portfolios that include impact investments to portfolios that consist only of traditional asset classes, we found that for several countries in our sample, impact investments improved overall portfolio performance and risk. This was observed using various of performance measures: exported portfolio returns, standard deviation, Sharpe ratio, portfolio beta, Treynor ratio and Jensen Alpha ratio. Based on these findings, this study advocates for fund managers to allocate more capital towards impact investments as this is likely to boost their overall returns