FUTURE RETURNS

Quick takes on risk profiling, hedge-fund activists and impact investing.

WEKNOW… That risk profiling is standard practice in the investing world, but research suggests that 83.3% of the questionnaires “in use by the industry are not fit for purpose .” Current Practices for Risk Profiling in Canada

and Review of Global Best Practices, published by an Ontario Securities Commission independent committee called the Investor Advisory Panel, concluded the questionnaires have too few questions, poorly worded or confusing questions, arbitrary or outright poor scoring models, and merge multiple factors without clarity. Furthermore ,55% didn’ t have a“mechanism to recognize risk-a verse clients that should remain only in cash .” Slightly more than half of advisors said the majority of their clients had completed a risk questionnaire, yet“only 11% of firms could confirm that their questionnaires were‘ validated’ in some way .”

WE LIKE… To make an impact, but also want results at the same time. Turns out, 48% of 1,500 investors surveyed by the Merrill Lynch Wealth Institute agree, but 62% aren’t convinced that impact investments can deliver competitive returns. Nevertheless, roughly half those surveyed would add such investments to their portfolios. The institute also found that millennial sp lace“greater importance on the issues they consider important than on financial returns” and are leading the way in the demand for impact investments.

WE SUFFER ... If we’ re not active, but it appears as though hedge-fund activism hurts innovation and the larger economy. A study involving 13,332 companies targeted by hedge funds between 1996 and 2008 confirmed that they were boosted by such interest, but competition suffered .“[ Hedge fund activism] has significant product market spillover effects on the industry rivals of target firms ,” the researchers wrote in the study that was published in the January issue of the Journal of Financial Eco

nomics. They found that cost-cutting at both the target companies and their competitors in response may result in reduced R& D investment and that industry consolidation may also hurt the incentive to innovate.