Illuminate aims to deliver a service that simplifies and automates sustainable investing. Illuminate offers recommended portfolios constructed using Modern Portfolio Theory ("MPT") principles and optimized for your risk tolerance. From there, you can customize your portfolio and Illuminate will take care of the rest by reinvesting dividends, rebalancing the portfolio in a tax-efficient way, and performing daily automated Tax-Loss Harvesting, as needed.
Illuminate's recommended portfolios are designed to provide an attractive tradeoff between risk and long-term, after-tax, net-of-fee return through a diversified set of global asset classes, each of which is represented by low-cost exchange traded funds (ETF) and individual stocks. This methodology describes the process Illuminate uses to construct its recommended Core portfolios, as well as the ongoing monitoring and rebalancing process, so that all portfolios remain close to their target allocations while seeking to minimize taxes from realized gains.
At Illuminate, we evaluate potential investments against the Paris-aligned benchmark that support limiting global warming to well below 2°C, with efforts to limit it to 1.5°C above pre-industrial levels. This framework requires carbon reduction targets and year-on-year decarbonization trajectories, allowing us to select companies that demonstrate both financial and sustainable performance. We believe that the risks caused by climate change are not adequately priced into the market.
We regularly monitor and rebalance portfolios to maintain their diversification. In addition, we aim to reduce potential tax liabilities by evaluating the tax impact of each asset class and adjusting allocations accordingly for taxable and non-taxable (retirement) accounts.
Our investment methodology employs five steps:
- Identify a diverse set of asset classes
- Select the most appropriate funds to represent each asset class analyzing both financial and sustainable performance
- Apply Modern Portfolio Theory principles to develop asset allocations that seek to maximize the expected return for each level of portfolio risk
- Determine your risk tolerance to select the allocation that is most appropriate for you
- Monitor and periodically rebalance your portfolio, taking advantage of dividend reinvestment
Modern Portfolio Theory is one of the most widely accepted frameworks for managing diversified portfolios. The economists who developed MPT, Harry Markowitz and William Sharpe, received the Nobel Prize in Economics in 1990 for their groundbreaking research. While MPT has its limitations, especially in the area of extreme downside scenarios, we believe it is the best framework on which to build an investment management service.
Sophisticated investment management services were once available only to wealthy investors through financial advisors. Many of those advisors charge average annual management fees of 1%, and have account minimums of at least $1 million. By implementing a completely software-based solution, informed by decades of academic research, Illuminate is able to deliver its automated investment management service at much lower cost than traditional investment management services.
Finding Asset Classes
Research consistently has found the best way to potentially maximize returns across every level of risk is to combine asset classes rather than individual securities. The first step in our methodology is to identify a broad set of diversified publicly accessible asset classes to serve as the building blocks for our portfolios.
We consider each asset class's long-term historical behavior, risk-return relationship, and expected behavior based on long-term trends and the macroeconomic environment. We also evaluate each asset class's correlation with the other asset classes, resistance to inflation, cost to implement via ETF (expense ratio), and tax efficiency.
Based on a thorough analysis, our investment team currently considers the following asset classes:
- US stocks - Ownership shares in US-based corporations. The US has the largest economy and stock market in the world.
- Foreign developed market stocks - Ownership shares in companies from developed economies like Europe, Australia, and Japan.
- Emerging market stocks - Ownership shares in companies from developing economies such as Brazil, China, India, South Africa, and Taiwan.
- Dividend growth stocks - Ownership shares in US companies that have increased their dividend payout each year for ten or more consecutive years.
- US bonds - High-quality debt issued by the US Treasury, government agencies, and US corporations.
- US corporate bonds - Debt issued by US corporations with investment-grade credit ratings.
- International market bonds - Debt issued by governments and quasi-government organizations from non-U.S. countries.
- Municipal bonds - Debt issued by US state and local governments. Interest is exempt from federal income taxes.
- Treasury inflation-protected securities (TIPS) - Inflation-indexed bonds issued by the US federal government.
- Real estate - Accessed through publicly traded US real estate investment trusts (REITs).
Selecting Investments
Illuminate uses low cost, index-based ETFs and individual stocks to represent each asset class. A significant amount of research has been published that shows active mutual funds not only underperform the market, but those that outperform in one period are unlikely to outperform in subsequent periods. The semi-annual review of active funds by S&P Dow Jones Indices published at the end of 2024 (SPIVA US Scorecard) indicates that 90% of US domestic active funds have underperformed their benchmarks over the last 10-year period.
For the U.S. stock allocation, we replicate the composition of a leading ETF through direct stock ownership, enabling our clients to retain shareholder voting rights while eliminating the expense ratio typically associated with fund management.
| Asset Class | Industry Average Active Fund Expense Ratio | Illuminate Fund Expense Ratio |
|---|---|---|
| US Stocks | 0.66% | 0.00% |
| Foreign Developed Stocks | 0.73% | 0.12% |
| Emerging Market Stocks | 0.90% | 0.15% |
When choosing ETFs, we consider: sustainable performance alignment with Paris-aligned benchmarks, cost (lowest expense ratios), tracking error, liquidity, and securities lending practices.
The Paris-Aligned Benchmark
The Paris-aligned benchmark has several distinguishing characteristics:
- Requires a 50% reduction in carbon intensity compared to the investable universe
- Excludes companies involved in fossil fuels and electricity producers with high greenhouse gas emissions
- Requires at least 7% year-on-year carbon reduction
- Maintains a stronger ratio of green to brown investments
- Prioritizes companies that set science-based targets
- Excludes companies involved in controversial weapons and those that violate UN Global Compact Principles
- Disqualifies companies after 2 consecutive years of misalignment
Asset Allocation
We create eight different risk levels, ranging from very conservative (Level 1) to very aggressive (Level 8):
| Level | Stock/Bond Allocation |
|---|---|
| 1 | 20/80 |
| 2 | 35/65 |
| 3 | 50/50 |
| 4 | 60/40 |
| 5 | 70/30 |
| 6 | 80/20 |
| 7 | 90/10 |
| 8 | 100/0 |
For each risk level, we determine the ideal allocation using portfolio optimization techniques. Additional constraints ensure sufficient diversification and alignment with our Paris-aligned benchmark criteria.
For any of these risk levels, clients can customize their portfolios by selecting from available thematic investment options including Climate Technology, Women's Empowerment, Carbon Credits, Water Solutions, and Clean Energy.
Determining Risk Tolerance
We ask six questions to evaluate both your objective capacity to take risk and subjective willingness to take risk, using a point-based system.
Rebalancing and Ongoing Monitoring
Illuminate monitors portfolios and periodically rebalances when dividends accrue, deposits or withdrawals are made, or if allocation drifts justify a change. We use cash inflows to buy underweight asset classes and threshold-based rebalancing to reduce turnover, taxes, and trading costs.
For the U.S. stock allocation specifically, we conduct scheduled rebalances twice yearly (June and December) to align with the MSCI Paris-Aligned Climate Benchmark methodology.
We recommend reviewing investment plans every three to five years to determine whether your risk tolerance and target allocation should be updated.
