Once upon a time, a money writer named Dani Burger decided to test an investing theory based upon cats. Yes, those kinds of cats — cute little fluffy, purry felines. She put together a beta test for an ETF (exchange-traded fund) based on companies that have the word cat in their name (CATerpillar, communiCATions, etc.), ran a six-year backtest, and the results were phenomenal. A nearly 850,000% return kind of phenomenal.
What the ETF?
OK, so before we dive too far into this, let’s clear up a couple of things. If you don’t already know, an ETF is a marketable security that tracks assets pretty much the same way an index fund does. It can be made up of commodities, bonds or pretty much any other assets. And unlike mutual funds, an ETF trades like a common stock. They’re also easily built around themes — like cats, for example — but more commonly, on particular industries, or around personal preferences and passions, like green companies, ethical or sustainable practices, and even religious beliefs.
Burger, who writes for Bloomberg, thought for a moment she’d hit on something big with her pretend fund. So she had other money nerds take a look, including Nicholas Chan, portfolio manager in Goldman Sachs’ Quantitative Investment Strategies group.
"It’s very curious, and I appreciate the effort,” Chan reportedly told her. “But you came up with an investment idea that doesn’t have economic intuition. When we come up with an investment hypotheses, we’re economists first and statisticians second.”
Turns out Burger’s fund failed nearly every conceptual test that ETFs are built upon, despite it’s ridiculous return opportunity.
Good to know. I won’t run out and create my own ETF anytime soon.
What I can do, though, and what you can do as well, is talk to a financial planner about how to invest around your personal beliefs, likes and dislikes. It’s known as values investing or impact investing.
How values investing works
I reached out to Tyler Landes, a financial planner based in Kansas City, Missouri, about the best way to go about doing this.
“I'm definitely not a ‘quant’ by any means, but I do enjoy helping clients craft a portfolio that fits their values,” Landes told me. “In the same way they enjoy impacting their community through volunteering or giving, investors like to know that they are making a difference, even if it's small, by the companies they choose to invest in.” (Quick FYI for newbie investors: “Quant” is short for quantitative analyst, which is basically someone who uses math to make investment decisions.)
According to Landes, values investing also can be an excellent forward-looking strategy as the country and economy moves toward things like cleaner energy, inclusive workplaces and sustainability in general.
“For the average investor, I council that it may not be feasible to craft a portfolio that covers 100% of values, but as fund companies catch up with demand it is getting easier,” Landes said.
“Creating a portfolio that aligns 100% with your values can be difficult for a couple reasons,” he explained. “First, it's difficult to find the mutual fund or ETF that matches your personal values exactly. A basic example would be a fund that excludes tobacco, weapons, and pharmaceuticals, but if pharmaceutical research saved your life, maybe you have no beef with those companies.”
“Second, there is still a responsibility to have a properly diversified portfolio that matches financial goals with risk tolerance, whether you use values-based investments or not. Investors should have proper exposure to different asset classes to mitigate risk and volatility,” Landes said. “It's possible to do that while still supporting your values, but you may have to be flexible in some areas.
A new way to invest in cats (or other stuff you care about)
The next big thing he’s doing with clients is combining their values-based investments with their charitable giving.
“For example, let's say you own the mythical ‘Cats’ fund in a standard brokerage account, and it's gone up 1000% this year because, well... it's cats. A great way to make a direct impact in the lives of actual cats might be to donate some shares of your ‘Cats’ fund directly to the ASPCA or to your local shelter,” Landes explained.
Donating appreciated shares nets you a tax deduction for the shares’ full fair-market value, while also avoiding tax on the gains, he said.
“Or if you're not ready to make a donation just yet, you can also put shares of your ‘Cats’ fund into a charitable account that you control (DAF - Donor Advised Fund), and then grant it out to cat-based charities later on as you see fit,” he continued. “This way, not only do you feel good about what you're investing in, but you also make a direct impact with the gains from that very investment.”
So, if you’re ready to align your investments with your personal values, a financial planner or other financial professional can help you do that. Like anything involving your money, however, it’s a good idea to do your research and talk to several different people before throwing your dollars in the ring. It could be the difference in your investments being the cat’s breakfast or the cat’s pajamas.