Morgan Stanley Adds ‘Impact’ Portfolios in Brokerage

Morgan Stanley, which has set a goal of attracting $10 billion of client assets to sustainable investing products over the next few years, is adding two such portfolios for its wealth-management customers.

The accounts invest with a range of outside managers who either screen to avoid certain companies or actively seek out businesses that have shown success in environmental or social issues. The Investing with Impact portfolios feature one balanced and one equity offering.

Morgan Stanley already has about $3.5 billion in more than 100 products aimed at providing social benefits along with financial returns, said Hilary Irby, who leads the New York-based bank’s so-called impact investing effort. The new offerings may accelerate that growth by providing clients a pre-selected mix of holdings that are diversified while following principles of sustainable investing.

“These portfolios can absolutely be a client’s full portfolio,” Irby said in an interview. As the bank creates products that allow customers to satisfy “impact objectives, and not necessarily have to give up those financial goals, then we can move more of our clients’ resources to help address some of the sustainability issues the world is facing broadly.”

The biggest U.S. banks have sought to help allocate capital to efforts such as community development, education and environmental preservation both in response to client demand and in the wake of public outrage and government rescues resulting from the financial crisis.

Affordable Housing

Morgan Stanley Chief Executive Officer James Gorman pledged $1 billion last year to help improve affordable housing as part of the bank’s push into sustainable investing that included promoting research and developing new products. The broader trend has spanned public and private markets and has also been called social-impact investing or socially responsible investing.

Morgan Stanley’s brokerage, the world’s largest by number of financial advisers, has 4 million clients with $2 trillion in assets at the firm.

The bank constructed the portfolios to reduce the biases typically associated with sustainable strategies, notably that they are predominantly in small-cap growth companies, said Chad Graves, who oversees impact investing for wealth management. The equity portfolio should have similar risk and return characteristics to broader indexes such as the Standard & Poor’s 500 and the Russell 1000, he said.

Steady Income

“We don’t think about this as a separate asset class, we don’t think about this as something that has to sit off in a corner because it’s a unique way of investing,” Graves said. “It’s not unique in that the objectives of this are exactly the same as they would be for a portfolio that wasn’t invested for impact. We want to get the same financial returns.”

The portfolios may also aid Morgan Stanley’s push to move more clients into fee-based managed accounts that provide steady income to the bank. The firm had $762 billion of client assets in fee-based accounts at June 30, up 21 percent from a year earlier, and it has set a goal of $1 trillion such assets.

The balanced portfolio, which invests about 60 percent in equity and 40 percent in debt, has a minimum investment of $750,000, while the equity portfolio has a $400,000 minimum, Graves said. The bank is seeking to develop a similar donor-advised fund with a $25,000 minimum investment, said Jim Tracy, who runs the brokerage’s consulting group.

“This is an emerging opportunity for investors, and we want to be known as the firm that when people see what we’re doing, they know that we’re serious about it,” Tracy said. “And it’s not just something we’re doing for the ultra-rich.”

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