This is how finance sees the world:

This is how my 3-year old daughter would see the same equation:

1 + 1 = 2

In the wake of the recent JP Morgan debacle it is even clearer that, in too many ways, finance has gotten unnecessarily complicated. From unexplainable derivatives to densely packed academic papers, we continue to try to hedge the un-hedgeable and explain the unexplainable.

Perversely, the complications have served the industry well over time. Many investors seem convinced (so far) that investing is a process so intricate that it is best left to those who trumpet their services most opaquely. And loudly.

That is not to say investing does not take skill. But it is too often forgotten that investing is sometimes as much art as science. And that risk, no matter how dressed up, is still risk. Modeling is fine, as long as it leaves room for human nature.

There is plenty of room to add value as financial professionals. Being a good steward of people’s hard earned money is a valuable service. But a confusing maze of unnecessary middlemen, combined with manufactured complexity of financial instruments, destroys rather than adds value.

During the CFA Conference, the President and CEO of the CFA Institute, John Rogers, issued a call to action urging all members to take the necessary steps to restore trust in the financial services industry. It was a timely message. Focusing on transparency and actual client needs are effective remedies for an ailing industry. And, best of all, they are not complex in the least.

Jim is Portfolio 21's Chief Investment Officer.  He has more than 20 years of experience in socially and environmentally responsible investing. 

Aside from the diversification benefits, frontier markets offer substantial opportunities.  The International Monetary Fund expects significantly greater economic growth in emerging and frontier economies than in developed economies.  Furthermore, this expected growth comes without the enormous debt loads and fiscal troubles that are plaguing most developed economies.  Standards of living and health are on the rise in many frontier economies, and will drive economic development.  The lower the per capita income, the greater the potential is for growth.    Demographics in frontier economics are also favorable relative to developed economies.  Developing countries tend to have a greater population of young people and production will surely shift to where the hardworking people live.   This will likely result in a rising middle class with appetites for food, energy, financial services, and electronics.

Investing in frontier markets can be challenging.  Stocks in frontier markets are generally driven by local dynamics as opposed to foreign institutional investors, resulting in lower trading volumes.  Additionally, there are more inefficiencies in frontier markets, although at times inefficiencies can translate into profitable investment opportunities.  Frontier market stocks are cheaper than developed markets.  The price-to-earnings ratio for the MSCI Frontier Emerging Markets Index is currently 12.75, while this ratio for the MSCI World Equity is around 14.75. The dividend yield is also higher in frontier markets.  However, companies in frontier economics may lack good governance practices, making careful company research a must.  In summary, where there are potential opportunities for enhanced return, there are often increased risks to navigate.

Tony is Senior Portfolio Manager with Portfolio 21 Investments.  He has 15 years of experience in the field of investment management.

What about risk?  Certainly some of the risks associated with the market bottom have been addressed.  We don’t have to worry about a big bank going bust tomorrow as we did back in the dark days of 2008 and 2009 (whether or not a few of them should have  is another story).  But is there really less risk in the market these days?

Central Banks worldwide have tripled the size of their balance sheets.  In addition to this being an event without historical precedent, there is the none-too-small matter of increased interest payments when rates eventually rise.

Greece did not default, but it is certainly not out of the woods, while Portugal, Italy, and Spain also find themselves in a heavily wooded area.  The European banks are still highly leveraged and loaded with debt from Portugal, Italy, Ireland, Greece, and Spain.

Corporate profit margins are at a record high with nowhere to go but…higher to new records?

The housing market is still searching for a bottom and unemployment, though improved, is still a drag.

Throw in an Iranian nuclear threat and you start to wonder if risk hasn’t increased since 2009.

So, why have stocks gone straight up off the bottom?  Some say the stock market is forward-looking and has discounted all of the above risks already.   Some say that stocks have been and will continue to be bought because they are cheap relative to bonds (disregarding that bond prices have been and are being held artificially low).

Or, maybe, Central Bank liquidity has provided a backstop for investors, which has encouraged them to invest in the riskiest and relatively (to bonds and cash) cheapest asset available in a search for return of any kind. Expect to see some volatility once the money printing stops and the market is allowed to re-price assets.

Jim is Portfolio 21's Chief Investment Officer.  He has more than 20 years of experience in socially and environmentally responsible investing. 

The panelists critiqued the general trend toward short-term investing; for example, in the 1980s the length of an average stock investment was five years, whereas today it is only five months.  In another example, a panelist recounted attending a recent conference where Chief Financial Officers from various corporations were queried about their investment horizons.  The majority said their horizon is less than 1 year, some less than 1 quarter.  As investors have become more focused on the short term, the challenge is to develop a system that rewards longer-term thinking while incorporating broader environmental and social issues into investment decision making.

Areas for improvement suggested by the panelists include clarifying the legal framework for fiduciary responsibility. Most often, fiduciary responsibility focuses strictly on financial attributes without consideration of environmental or social concerns.  We believe fiduciary responsibility should incorporate environmental and social issues in order to comprehensively evaluate both risk and opportunity within sectors and companies.  Traditional investment analysis underestimates the long-term opportunities and risks associated with ecological limits.  As long term investors, we conduct fundamental research that combines traditional investment information with environmental research.  This process identifies companies that are innovative, competitive, and that are creatively responding to ecological limits.

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.

GABV member banks favor a triple bottom line approach and are committed to serving their respective clients and communities.  The group emphasizes long-term partnerships, as well as transparency and good governance.  In contrast with the “too big to fail” banks, GABV banks are focused on core banking activities, gathering deposits, and making good loans.  At Portfolio 21 Investments we agree that the GABV model is an important foundation for a successful bank in a future with increasing environmental and social constraints.  Furthermore, it is becoming apparent that GABV member banks often have better growth prospects, and tend to be better capitalized and generate higher returns on assets.

However, raising capital to foster bank development and growth is still a major hurdle for most GABV members.  Most equity investors overemphasize earnings and asset growth at the expense of externalities.   These externalities present risks that are often ignored by “traditional” banks.  GABV constituents have attempted to address many of these external environmental, social, and governance risks with a new banking model.  We expect to see other banks around the world increasingly adopt a similar philosophy as previously ignored risks emerge and become more widely known.  Investor confidence and increased funding opportunities should potentially follow suit.

For more information on the Global Alliance for Banking on Values visit www.gabv.org.

And congratulations to New Resource Bank for its recent Best for the World Award from B Corporation!

Tony is Senior Portfolio Manager with Portfolio 21 Investments.  He has 15 years of experience in the field of investment management.

The information presented above nor any opinion expressed shall be construed as an offer to sell or a solicitation to buy the security.