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January 11, 2010
Pax World Joins With Morningstar Associates to Launch ESG Managers Portfolios
    by Robert Kropp

The new series of asset allocation funds are designed for investment advisors and clients looking for environmental, social, and governance criteria in their investments.

A series of asset allocation funds launched by Pax World and Morningstar Associates seeks to provide investment advisors and their clients with portfolios featuring investment managers that incorporate environmental, social, and governance (ESG) factors into their investment analysis and decision making. The funds were launched on December 31.

The ESG Managers Portfolios consist of four funds that incorporate a sustainable investment strategy, ranging from conservative to aggressive growth. Pax World is the investment adviser to the funds, responsible for subadviser oversight, fund administration and distribution. Morningstar Associates will be responsible for asset allocation, manager selection, and portfolio construction.

Joseph Keefe, President and CEO of Pax World, told, “Our partnership with Morningstar underscores the mainstreaming of ESG factors into investment analysis. Sustainable investing has arrived and has become a mainstream investment strategy.”

“While there are some SRI advisors already doing this (like FAFN, PAM, and Veris), up until now, for 98% of advisors who were asked by their clients for a sustainable investing strategy, they would be faced with a laborious and time-consuming process,” Keefe continued. “Now, with this launch, advisors can provide for their clients a one-stop turnkey process. It’s a great leap forward for the industry.”

The portfolios are managed by investment firms that incorporate ESG factors, as well as traditional valuation methods, into their analysis and decision-making. The 11 managers or subadvisers selected to manage the assets in the portfolios include Pax World.

Jon Hale, Managing Consultant of Morningstar Associates, said, “Morningstar based its research on our massive global database, which identified 4,500 different strategies using some form of ESG analysis. Out of this robust universe of options we identified 15 strategies from the 11 asset managers.”

“The underlying strategies for all the funds are the same,” Hale continued. “The aggressive growth fund is an all-equity portfolio, while the conservative fund is 35% equities and 65% fixed income. “

“We figured that in all but the aggressive growth fund, you’re going to need some fixed income exposure, and we wanted to take an innovative approach to that,” Hale said. “We have two fixed income strategies that focus on bonds for community development and environmentally sustainable activities. A third fixed income strategy applies ESG criteria to its corporate selection process.”

“We think that the bond portion of the portfolios is well-diversified.”

The fixed income securities included in the funds are managed by, among others, Community Capital Management and MMA Capital Management.

Also included among the fixed income portion of the portfolios is Pax World’s High Yield Bond Fund, which uses a sustainable investing approach in investing up to 80% of its assets in high-yield, fixed income securities that are rated below investment grade.

Pax World manages five investment strategies included in the portfolios. In addition to its High Yield Bond Fund, Pax World manages the International Fund, the Multi-Cap Equity Strategy, the Real Return Strategy, and the Global Green Fund.

According to Pax World, until now only individual mutual funds have followed a sustainable investment strategy. The ESG Managers Portfolios are designed to provide investment advisors with multi-manager asset allocation funds for clients interested in sustainable, socially responsible, or green investments.

The overall diversification of the funds is enhanced, according to Pax World and Morningstar Associates, by the variety of approaches to sustainable investing practiced by the managers chosen for the portfolios.

Hale said, “We didn’t want to impose a uniform ESG strategy on the investment managers, which provided an added element of diversification to the portfolios.”

Keefe spoke to the timing of the launch, saying, “The demand for such products is fueled by a confluence of factors, including the financial crisis, concerns about climate change, the desire of investors to align their investment strategies with their values. In sum, what we’re seeing is a shift from an industrial economy to a sustainable economy. Investors are beginning to see the possible returns available in such a shift.”

Hale, who himself has many years of experience with sustainable investing issues, added, “I went to Joe a couple of years ago and said, It’s time to do this.”

Keefe said, “At Pax, we believe that over time, there will be significant investment returns associated with the shift to a sustainable economy.”

“The growth of sustainable investing will depend on our industry’s ability to roll out innovative solutions for investment advisors and their clients,” Keefe continued. “This is the type of innovation that the market needs.”

While the ESG Managers Portfolios are available to individual investors, they can only be purchased through financial advisors.


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