MIDDLE MENSCH
IMPACT OUTFITS LIKE DAVID FANGER’S SWELL—AND THE INSURANCE GIANT BACKING IT—ARE BETTING LOW FEES, MINUSCULE MINIMUMS AND A FEEL-GOOD FOCUS WILL LURE MILLENNIAL INVESTORS.
Impact outfits like David Fanger’s Swell—and the insurance giant backing it—are betting low fees, minuscule minimums and a feel-good focus will lure Millennial investors.
If you think Hollywood is full of excrement, consider the Donald C. Tillman Water Reclamation Plant, a facility that processes 45.6 million gallons of Los Angeles-area sewage per day—precious stuff in southern California. Peering out across Tillman’s bubbling muck, mustachioed operations manager Michael Ruiz offers a line reminiscent of Chinatown or Mad Max. “Everyone’s fighting for this water,” he says grimly. “Water wars.”
Nobody knows this better than the founder and CEO of impact outfit Swell Investing: hard-hatclad David Fanger, who listens intently as Ruiz explains the promise of new pumps made by a company called Xylem. The gear being tested at Tillman helps blast wastewater with ozone, a technique just as safe but much cheaper and quicker than traditional osmosis cleansing. One day, Xylem’s technology could help Ruiz realize annual savings of about 40%, reducing the cost of delivering treated water to nearby public parks and the San Fernando Valley—in lieu of precious potable water—by about $10 million.
“Of all the companies in our clean water portfolio, Xylem is the most discussed,” says Fanger, 40. “By 2030, demand will outweigh supply by 40%, so that’s a huge quantity of water to supply.”
Investors can buy into Xylem and 43 other companies, like biocide maker Albemarle and
wastewater reuse outfit Air Products & Chemicals, through Swell’s Clean Water portfolio. If water’s not your thing, you can choose among theme portfolios including Healthy Living, Disease Eradication, Zero Waste, Green Tech and Renewable Energy—all based around the UN’s sustainable development goals.
Swell is still tiny, managing just $13 million in assets for some 2,000 customers. But they’re young (average age: 36) and their numbers are growing quickly (by about 14% each week), lured by relatively low fees (0.75% versus twice that for some peers) and a minuscule minimum investment ($50). Unlike its startup brethren, Swell should have plenty of runway given its status as a subsidiary of Pacific Life, the 150-year-old financial services giant with assets of $143 billion that has happily shelled out $11 million to bankroll Fanger’s brainchild.
Pacific Life is betting on an emerging trend: Millennials wanting more than financial returns from their portfolios. Recent reports have placed the global market for socially responsible investing at $23 trillion, reaching $53 trillion by 2025; a study by Morgan Stanley found that 38% of Millennials are very interested in sustainable investing versus 23% of the total population; 90% said they wanted eco-focused 401(k) options.
“The next generation of investors wants to align their money with their values,” says Adrian Griggs, Pacific Life’s chief operating officer. “From shopping to investing, they want their dollars to have a positive impact on the world. That’s why we’re so excited about Swell.”
Fanger came up with the idea for Swell while working in Pacific Life’s M&A department in 2012 on a due-diligence visit to a particularly demoralized company in New York. “Wow, the staff ’s not happy,” Fanger noted to colleague Liam Monaghan on the flight back to California. “The values they have don’t really align with this positive element that employees are looking for.” So the duo decided to create something that would allow people to invest in companies that made them feel good. They built out a website to display the product with the help of a six-figure infusion from Pacific Life, which was intrigued at the prospect of seeding a product that might reel in a much younger audience than its base of annuity customers.
Fanger, a type 1 diabetic, scoured public databases to find out which publicly traded outfits donated the most to fighting his and other diseases. But when his first iteration went live in early 2015, its roster of holdings was dominated by bulk givers like Wal-Mart and Goldman Sachs—a big turnoff for most Millennials. There was also the issue of interface: Because Fanger’s startup wasn’t yet a registered investment advisor, users had to buy into his portfolios through Motif, a brokerage platform that lets people invest in themed baskets of stocks. After an initial burst of interest, Swell’s clunky application faltered.
With Pacific Life’s backing, Fanger split from Motif and established Swell as a registered investment advisor, built a new website and mobile interface where consumers could trade its products and brought on analysts to put together more enticing portfolios. The new version went live in May 2017, and with the wind of the bull market at its back, Swell’s investor base has been growing rapidly.
“We know that consumers don’t want to sacrifice return,” Fanger says. All six of his portfolios have matched or beaten index benchmarks since May.
Of course, Fanger isn’t the first to offer a retail solution for impact investing. A minimum of $1,000 gets you into BlackRock’s Impact U.S. Equity and Impact Bond funds, while upstart Aspiration Redwood Fund requires just a $100 outlay, though some may be disappointed to find both are packed with blue chips, unlike Swell’s small-cap-heavy portfolios.
Then there are new-breed robo-advisors Wealthfront and Betterment, which charge annual advisory fees starting at 0.25% and feature minimums of $500 and $0, respectively; both introduced socially focused options of their own over the summer. Brokerage outfit FOLIOfn beefed up its impact-investing reach last year by acquiring First Affirmative Financial Network, which specializes in social outlays. The aforementioned Motif does offer customizable portfolios including impact options like Sustainable Planet, Fair Labor and Good Corporate Behavior, and charges a monthly fee of $9.95 with a $1,000 minimum.
Fanger differentiates his offering by dealing only in impact investing. Unlike his robo rivals, he doesn’t use algorithms to generate portfolios; Swell’s team works to create and update them as companies’ contexts change (Whole Foods getting gobbled up by Amazon, for example). It also offers customers more flexibility than a traditional actively managed fund (if you think Tesla is overvalued, or if you don’t want the nuclear exposure of Actuant, you can simply remove them from your Swell portfolio).
But as with proverbial story stocks on Wall Street, Swell’s success, in the midst of an impact-investing gold rush, may hinge on the aspects of its pitch that can’t be quantified—like that rural farmer who uses Xylem’s pumps to save countless hours that would otherwise be spent trekking back and forth to distant wells. Assures Fanger: “Somebody working on their farm will be able to get that water.”
Pacific Life was intrigued by a product that might reel in a younger audience than its base of annuity customers.
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