Many institutional investors are under increasing pressure to consider their holdings’ environmental or social behavior. However, if they’re invested in commingled vehicles, they leave that discretion up to their investment manager—who may have a different opinion of what should be held in the portfolio.
In this case a Catholic university’s endowment board voted to divest from fossil fuels. However, the endowment was invested in commingled funds that held companies involved in fossil fuels. That meant they couldn’t remain in the active commingled vehicles and still uphold their pledge to be fossil free. What’s more, the board expressed to us a future desire to explore faith-based screens, something their current commingled funds couldn’t accommodate. Could we give the client control over its portfolio holdings while remaining invested with its active managers?
Parametric proposed combining the underlying positions in each active or passive fund into a single account. Any environmental or social criteria could then be applied to this portfolio. The endowment directed each active manager to deliver a model portfolio (holdings and weights) to Parametric, which then aggregated these models, along with holdings from selected indexes, into a custom benchmark based on the endowment’s target allocation.
Once the positions were combined, Parametric could use its ESG data sets in conjunction with its expertise in portfolio construction to build a portfolio that mirrored the client’s target asset allocation while remaining invested with the active managers the university had carefully chosen. To accommodate the fossil-free mandate, Parametric modified the custom benchmark to omit any owners of fossil-fuel reserves. We then invested in the underlying holdings of the now fossil-free custom benchmark.