RIVERWATER IN THE NEWS

The Superiority of the Russell 2500 Over the Russell 2000

Article featured in Advisor Perspectives. May 26, 2021. What if a baseball team trades away its all-stars year after year and replaces them with rookies or aging veterans? That’s the problem with using the Russell 2000 as a small-cap benchmark. Better to let your winners run—and benchmark to the Russell 2500 instead. Don’t miss Riverwater co-founder & CIO Adam Peck published at Advisor Perspectives.

Small caps have been outperforming large caps. Small-cap value stocks, for example, just had their seventh best-ever quarterly return by posting gains of over 21%, as measured by the Russell 2000 value index. This came after they posted their best-ever quarter a year ago, with a 33.4% return in the second quarter of 2020.

Can small-cap value this keep up?

Periods like the one just experienced historically portend well for the relative returns of small-cap value stocks. According to Furey Research, when value has a strong two-quarter relative performance, it outperforms growth by 7% on average the following year.

For investors wanting to capture outperformance in small-cap stocks, here’s a warning. Soon, some of the biggest winners among small caps will “graduate” out of the Russell 2000 index (and by extension its value and growth sub-indexes) when Russell conducts its annual rebalancing this summer. At that point, those winners will no longer be the largest among their cohorts. They’ll be midcaps and will be lumped in with companies that have been midcaps for decades.

Here’s a simple visual on what happens to a “graduate” of the Russell 2000 index:

Russell 2000 Microcap progression to Russell Midcap

Before graduation, a small cap is a much larger percentage of Russell 2000 than it is of the Russell midcap or more so the Russell 1000.

Because investors keep relatively fixed portfolio allocations to small, mid, and large-cap companies, the typical effect of graduation from the Russell 2000 is to reduce these winners’ importance to the overall portfolio.

That’s like a baseball team trading away its all-stars year after year and replacing them either with rookies (much smaller companies) or former midcaps that have slipped back (aging veterans).

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Should you seek investment advice on your 401(k) account?

Article featured in Valuewalk. May 24, 2021.

For most Americans, 401(k) plan accounts have become the predominant retirement savings vehicle.  Currently, more than $6.4 trillion is invested in 401(k) plans across the country, a 73% increase in the past ten years.1  An additional $2.7 trillion is invested in other defined-contribution plans, such as 403(b) plans for educational or non-profit organizations.1

Investment Advice For Your 401(K) Account

The vast majority of retirement plan participants do not consider themselves expert investors, nor do they want to take the time to manage their investments. Investors who want some level of professional advice on investment selection have a few basic options:

Target-date funds and balanced funds

Target-date funds are by far the most popular “do-it-for-me” approach, with 78% of 401(k) plan participants opting in—even though the average 401(k) plan offers 28 investment choices.Balanced funds are similar except with fixed allocation percentages rather than percentages that change over time.

Managed accounts

Some 401(k) plans offer a managed account program, in which an investment advisor serves as a plan fiduciary and provides tailored advice to participants based on their age, risk tolerance, time horizon and other personal factors. Managed account programs may or may not include financial planning services outside of the retirement plan, offering a more holistic view of an employee’s financial picture. These services clearly offer a more customized investment solution to participants, compared to target retirement date funds, but they come at a cost. Because of the advisory fee and perhaps a lack of understanding, only about 5% of participants used a managed account program.2

Professional advice from a financial advisor not associated with the plan

Many investors work with a financial advisor but keep their retirement accounts separate. That is, the advisor is aware of those assets but not charging fees to manage them. Implicitly, this means plan participants either believe they can manage their own investments or are satisfied with the “do-it-for-me” products offered by their 401(k) plan.

Why pay an advisor not associated with a plan?

Advisors typically charge between 0.5% and 1.0% of assets to provide ongoing financial advice.3  This may seem like an unreasonable charge to some; however, evidence indicates that net investment returns can be increased by up to 3% per year.4

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Sustainable agriculture is the next way ESG investors can fight climate change

Marketwatch. March 24, 2021. By Debbie Carlson

7 ways for ESG investors to profit from sustainable agriculture

The original green sector — agriculture — hasn’t been on the radar for environmental, social and governance investors, given industrial agriculture’s heavy dependence on pesticides, fertilizers and genetically modified seeds.

But ESG investors are turning their interest to agriculture as a way to fight climate change. In November, the US SIF, an organization that follows sustainable investing, said sustainable agriculture was an important investing issue for money managers, the first time this issue cracked the top five specific criteria. Of the $17 trillion (link) invested in ESG issues, money managers (link) said they devoted $2.38 trillion to sustainable agriculture while institutional investors (link) devoted $2.18 trillion to the theme.

It’s a harder investment for individual investors; there are no targeted mutual funds or exchange-traded funds for sustainable agriculture and just a handful of stocks to choose from.

Investing in sustainable agriculture is still in early stages, not unlike where the renewable energy sector was in 2007 as far as ESG investor interest, says Erin Fitzgerald, CEO of USFRA, a national network of farmer and rancher-led organizations that’s working to expand ESG investment in sustainable agricultural technologies. USFRA recently released a report (link) about how ESG investors can think about public or private investments in agriculture to mitigate climate change by improving soils.

That could mean a money-making opportunity for investors, especially if the valuation premiums usually given to ESG companies aren’t priced in. But given that it took renewable energy years to become profitable, there could be stumbles. Plus, some ag companies may be improving their environmental record but also have other aspects that ESG investors find distasteful, such as researching genetically modified organisms or poor worker policies.

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ESG: Growth Is Welcome, But What Drives Actual Change?

WealthManagement.com, March 11, 2021 By Cindy Bohlen

Encouraging news arrived late last year about the fast growth of investments managed with attention to environmental, social and governance (ESG) factors. Seventeen trillion was the headline dollar figure in the latest biannual report from trade association US SIF, which tracks the responsible investing industry.

Seventeen trillion represents a 42% increase over the dollar level US SIF found just two years ago. Today 33% of professionally managed dollars in the U.S. is invested with at least some consideration to ESG issues.

That headline growth is impressive and welcome, but I’m actually more struck by some of the undercurrents in the report, particularly with respect to what investors say is most important to them.

From Governance to Environment to Social…and now back to Governance

Of the three letters in “ESG,” it’s fair to say the “G” came first, in the sense of widespread awareness of the benefit of applying the concept as an investment factor. The level of a board’s independence—for example, by incorporating independent Chair and CEO roles—came up for widespread awareness in the 1980s, as did the level of executive pay.

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Malkiel’s Misguided View of ESG Investing

Advisor Perspectives, February 1, 2021

Burton Malkiel, esteemed author of the classic investing book A Random Walk Down Wall Street is one of the more prominent critics of environmental-, sustainable- and governance-based (ESG) investing. He called ESG investing a “self-defeating” strategy in a recent Wall Street Journal column.

But Malkiel and other detractors who claim ESG is a fad are missing a key element in their arguments, namely that companies are incorporating sustainability into their operations both in response to – and increasingly quite apart from – the ESG investing trend.

People invest in stocks because they want to make money. That’s a basic truth that ESG investing neither needs nor seeks to change. Rather, ESG investing asks, “If you can do good with your money while also achieving attractive returns, why wouldn’t you?”

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Greg Wait featured in Your ESG investment may be a ‘light touch’ fund and not as green as you think

Marketwatch. January 4, 2021

Environmental, social and governance investing resonates with people who want their investments to align with their values, and the boom in this investing style has fund companies launching more ESG investment vehicles.

But these funds may not be as green as investors think they are.

ESG investing considers both financial return and social and environmental good. But just as investors can disagree on where to draw the line between value and growth investment styles, they can come to different conclusions about how well companies are delivering in these areas. There are no U.S. nor global standards.

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Greg Wait featured in Benefits Magazine

Marketwatch. November 13, 2020

Even as the Trump administration actively discourages environmental, social and governance investing in employer-sponsored retirement plans — a rule the Biden administration may overturn — it’s not like investors had a lot of ESG choices to begin with.

When Morningstar looked at lineups for defined-contribution plans like 401(k)s or 403(b)s , the research firm found only 4.5% of these plans offered at least one sustainable fund — that is a fund that intentionally incorporates ESG.

But for those who want to invest that way, there are ways to do it within the company-sponsored retirement plan. It just takes some legwork to find them.

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Riverwater Partners’ Statement on Racial Equity

June 11, 2020

Worldwide protests over the past weeks spurred by the killing of George Floyd have brought our society to what we can only hope is a tipping point. We recognize that the effects of racial inequalities are pervasive and profound. In addition to unjust and unnecessary violence, disproportionately devastating realities in the Black community in the wake of the COVID-19 pandemic have further highlighted the effects of systemic racism. 

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