Socio-Political Influences On InvestingA Spectrem Group Whitepaper

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IntroductionIf rate of return was the only factor determining how investors invested, the work of a financial advisor would be much easier. It would all come down to mathematical equations, algorithms and actuarial tables, in effect.

While there are investors who consider only the bottom line in their portfolio and asset allocation decisions, most others are impacted by outside influences. They want their investment decisions to mean something beyond dollars and cents. They want their investment to be impactful instead of impacted.

Spectrem continually fields research to provide in-depth information regarding investors, plan sponsors and other entities engaged in the investment and financial services industry. Socio-Political Influences On Investing takes a closer look at some of those outside factors and how many investors admit allowing those factors to influence their investment decisions.

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WHEN POLITICS IMPACT INVESTINGKey Thought: Advisors need to be aware of investor concern regarding the political tug-of-war environment and be prepared to discuss with clients if their portfolios will be affected.

The 2018 mid-term elections produced results both sides can claim as victories. The Democratic Party took control of the House of Representatives while Republicans gained seats in the Senate. A split U.S. Legislature is considered a roadmap for gridlock in making changes to laws and regulations, and may forestall any initiatives forthcoming from the White House.

A survey of wealthy investors in October asked them what they foresaw for the mid-term elections, and what impact the results would have. Fifty-two percent of all investors predicted Democrats would gain control of the House of Representatives, which indicates that there was no overwhelming pre-game verdict of the outcome of the elections.

All investors were asked what they thought would happen to the stock market if Democrats gained control of the House, and 46 percent said it would lose the momentum it had through much of 2018 and begin to fall. However, 25 percent said the anticipated the stock market would remain at its current level and continue to rise.

Within a week of the elections, the Dow Jones Industrial Average suffered a 600-point loss in one day, and President Donald Trump blamed the anticipation of a Democratic-led House of Representatives, even though analysts said it had more to do with two key tech companies reporting lower-than-anticipated earnings. Democrats in the House are expected to use their new position of power to pursue course corrections on legislative maneuvers by President Trump in his first two years of office (especially in response to his immigration policies), as well as attempts to investigate the possibility of forcing the President to release his tax returns and a new look into enforcement t of the emoluments clause of the Constitution.

Advisors need to consider how government gridlock will impact investing, and whether legislative stalling will prevent the stock market from maintaining its climb through most of 2018 into 2019. Clients need to know advisor perceptions of the impact of legislative actions over the next two years.

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MADE IN THE USA?Key Thought: Product and company familiarity is more important to investors than the geographic base of a company’s headquarters or manufacturing facilities.

There is a portion of the American public that really wants to purchase products made in America and support American companies in that fashion. Likewise, there are investors who would love to invest in domestic products and companies, although such a decision limits them in terms of choice and rate of return.

Furthermore, very few companies in business today are STRICTLY American. Even companies which promote themselves as American-made can manufacture a majority of the product in the United States but send parts to other countries for assembly. The cost of labor in America makes manufacturing an expensive proposition, no matter how patriotic the company and its executives are.

The level of interest in American made products is only fair. According to Spectrem’s study Portfolio Decision-Making, investors were asked to put the level of influence of companies being headquartered in or owning manufacturing facilities on U.S. soil on a 0-to-100 scale, and neither factor rated over 50.0. the company headquarters question rated at 49.14 overall and the manufacturing question rated 47.32. There were barely perceptible differences between investors based on their political bend, indicating that this is not an issue of politics, it is an issue of economics, and investors do not overwhelmingly pursue investments in companies that have a majority foothold in the United States.

According to the study, of fair greater influence is familiarity with a product (67.18) or familiarity with the company (63.47).

American investors and consumers are now strongly attached to products and company names, caring more that their investments are with companies they know something about, with less concern about where the company is located or manufacturing products.

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WHEN CORPORATIONS SPEAK OUTKey Thought: Some investors care about the impact of social or political movements upon the investment potential of products, and want to either endorse or boycott companies based on public statements of social or political positions.

Occasionally, corporations put their public foot into muddy social waters, taking a stance on a topic of interest among most Americans related to matters of national social importance. To do so puts the corporation at risk of boycott among consumers and investors who do not agree with their stance, but it also puts a positive public face on the corporations among consumers and investors who agree with the stance the corporation took.

In the past, such corporate statements often revolve around environmental issues, including promises to reduce the company’s carbon footprint, or to reduce the company’s pollutants in manufacturing products. Occasionally, a company will move manufacturing from one foreign country to another in light of human rights violations occurring in the original country.

in the summer of 2018, athletic footwear and clothing manufacturer Nike took a stand about someone kneeling. It gave a role to former NFL quarterback Colin Kaepernick in its NFL preseason advertising campaign, and announced support for his pursuit of improved relations between law enforcement officials and the black community in America.

Investors reacted both immediately and over time. Nike’s stock price dropped significantly upon the initial announcement of the company’s support of Kaepernick, but in a month’s time sale of Nike products notably improved the company’s third quarter earnings report.

Do investors want corporations to speak out on social and political issues? According to Spectrem’s Investor Profile Tool, the answer is “No”.

On a 0-to-100 scale, in which “0” represents “no” and “100” represents “yes’’, investors placed their opinion on whether corporations should express opinions on political

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and social issues at 33.14. Considering that is an average response, it leans heavily toward disapproval.

However, asked if such statements impact investment decisions, investors again leaned toward “no” (38.98). Neither do they invest or divest based on corporate statements on social issues (36.42) . Asked if corporate statements on social issues would impact purchasing decisions, investors were more agreeable, rating that prospect at 47.82, which is still below the midpoint. Investors may not want to change their investment decisions or see companies speak out but they may want their advisor to discuss these issues with them. Asked if they want their advisor to discuss with them the investment implications of current events, investors placed their interest at 45.62, a midpoint that indicates some do and some don’t.

Keeping clients informed and educated regarding current event issues that have potential investment impact is an easy way for advisors to deepen their relationship with their client and create added value that doesn’t have to do with alpha.

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INTERNATIONAL AFFAIRSKey Thought: Advisors need to discuss with their clients their portfolio allocation towards international investments and how that could positively or negatively affect their rate of return, depending on the percentage and location of those investments.

Until early 2018, many Americans, even the smart ones, were likely uncertain about the meaning of the word “tariffs’’ and even more Americans were unaware that tariffs would matter to them in the immediate future.

But President Donald Trump, insistent that the United States was being taken advantage of in all of its international economic agreements, promised and in some cases enacted new tariffs on products coming into the United States from China, North Korea and even Canada in an attempt to promote negotiations for new economic agreements with our most frequent trade partners.

Suddenly, investors were noting, either on their own or in conversations with their advisors, that they had assets invested in products coming into the United States from China and elsewhere. Suddenly, those investors were finding out that the tariffs were impacting sales and the stock market was reflecting tariff decisions. For several months in early 2018, the stock market was running hot and cold amid constant conversations and Presidential tweets about global economic matters and tariffs demands, both those made by America and those which were suddenly being made against America.

As part of its Hot Topics page of the Spectrem Visual Analytics tool, Spectrem asked investors in mid-2018 if they would be paying more attention to tariff negations in the future, and 65 percent said “Yes.“ Only 38 percent, however, said they expected tariff battles to impact their investment decisions, although the conversations between the United States and some trade partners escalated during the summer of 2018 and could raise that percentage.

There are very few products or companies today who do not have some relationship with partners outside

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the United States. Using tariffs as a negotiating tactic is something President Trump has used to a far greater degree than most previous presidents, But investors are uncertain whether his negotiating ploy will have a long-lasting impact on global trade. Asked whether tariff battles will make the atmosphere for global trade worse (“0”) or better (“100”), investors rated their overall believe at 40.88, leaning a bit toward the belief that tariffs will have a negative impact on global negotiations.

Investors are paying attention to this topic and it is wise for advisors to discuss any potential concerns with their clients so they do not make a decision that is not in the best interest of their overall financial plan. For those investors that are day traders or market timers, advisors should discuss how to protect them from losses due to international “trade wars’’ or how to profit from them.

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SOCIALLY RESPONSIBLE INVESTINGKey Thought: Advisors should discuss with their clients if they desire to invest based on any moral or social beliefs, as well as discuss if that impacts their expected rate of return or investment portfolio.

It is possible for investors to point their investable assets towards companies and products which they know “do the right thing’’ regarding environmental safety and human rights behaviors towards employees. They can also make certain their money is not going into industries they do not appreciate, like weapons manufacturers, tobacco and alcohol companies, or companies that test products on animals.

But the fact that investors CAN do that does not mean that they DO that.

According to Spectrem’s Investor Perceptions of Socially Responsible Investing, among investors who know about and understand socially responsible investing, a majority believe that term refers to a number of types of investments:

• Investing in environmentally friendly investments/ companies.

• NOT Investing in companies or investments that manufacture or promote tobacco.

• NOT investing in companies that manufacture their products in countries that are guilty of human rights violations.

• Investing in companies that support a social cause such as fair trade/fair wage, or charitable giving (more on that later).

Asked to place their interest in socially responsible investing using a 0-to-100 scale, investors expressed the greatest interest (53.49) in investing according to human rights policies, Avoiding companies who don’t have adequate pay or good working conditions. At the midpoint (50.86) was interest in environmental impact, investing in companies that encourage and foster environmentally

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But neither of those ratings are overwhelming in favor of the practice. It is fair to say investors who want to make an impact with their investable assets are adamant about the practice, but most investors do not consider social responsibility when making investment decisions.

Asked why an investor would avoid considering social responsibility in their investment decisions, 55 percent said their investment decisions were entirely based on financial returns.

There are also some investors who do not know socially responsible investing is an option. According to Spectrem research, 33 percent of investors do not know what the term “socially responsible investing” means. However, it is not certain that knowing about such pointed investing means investors would invest in that manner.

Certainly, there are investors who do care about the social or human rights controversies that might surround companies or products, but for those that do, social responsibility of investments is not only a key component of investment decisions, but can also prompt an investor to increase investments to have a greater impact.

friendly practices and avoiding those companies that harm and damage the environment.

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IMPLICATIONS AND CONCLUSIONSAdvisors routinely cover the basic influences on investors, including risk tolerance and investment goals (security, income, a financial legacy). But they must forever prepare for the influences that come from current events, which can appear out of nowhere (I.e., corporate statements on social issues) and can create an impassioned investor who suddenly wants to make a specific investment maneuver based on the news of the day.

Today’s political environment has more flashpoints than ever before, on either side of the political spectrum. Investors may not be personally political, but politics can impact investment fortunes (tariffs and trade wars, for example). Advisors need to be knowledgeable about how politics impacts the investment environment and be prepared to discuss that potential with their clients regarding their portfolios which can possibly be affected by a turn of political events.

The world of investing is becoming more and more of a global stage, allowing investors the opportunity to take a stand regarding whether to invest in countries other than the United States. International investments are often part of a well-diversified portfolio, so it is critical for advisors to fully understand their client’s opinions regarding international investments. Advisors must fully educate their clients on the reason to or not to invest in international companies and examine the long-term impact including or excluding the international investment class could do to their portfolio returns and their financial plan.

Politics have become a more commonplace discussion than the weather, and as such advisors need to be prepared to have those open and frank discussions with their clients regarding this previously often avoided topic. Intense passions reside on both sides of the aisle and investors need to be aware how the current political climate could cause the stock market to make a number of unusual moves.

For those clients of advisors that are likely to have an impassioned response to a corporation taking a stand on a social issue, advisors need to proactively reach out to those clients to understand if their moral compass is directing their money into other investments.

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Socio-Political Influences On

InvestingA Spectrem Group Whitepaper

For more information visit our website!www.spectrem.com