Tuesday, 27 April 2010

Socially Responsible Funds: Forcing Investors to Buy Blind

Recently, one of my kids suggested I look into Socially Responsible Investing. She doesn't want to invest in companies like Copper Mesa, which is apparently doing bad things in Guatemala to the environment and the local population near their mine.

A popular way to invest in companies that toe the SRI line is to buy one of the many mutual funds (e.g. Social Investment Organization's 2010 Guide to SRI Mutual Funds) which promise to adhere to such principles. Do you think you could actually find out whether Copper Mesa is amongst the holdings of any particular fund? Unfortunately, no. Funds seem to only publish their top ten or twenty-five holdings. An exception is the only ETF in the field in Canada, the iShares Jantzi Social Index Fund (symbol: XEN), which has a constantly updated complete list of its holdings. They are not especially noble in that since all ETFs are similarly transparent. At least one can see there is no Copper Mesa within.

Beyond the generality of statements like the following, a fund prospectus isn't a lot more explicit or detailed about its own method of stock selection.
"Positive and negative screening, such as tobacco, alcohol, environmental performance, human rights violations, community involvement and employee relations. Screening involves the application of pre-determined social or environmental values to investment selection. The aim is to screen out particular companies or sectors based on values choices, or to positively select companies considered “best of sector.”
Does Jantzi Sustainalytics, the well-established leader in SRI indexing, do any better in revealing what companies its indexes contain or the exact inclusion/exclusion criteria? Not that I could find.

To my mind, simply sticking the SRI label on a fund and asking individual investors to believe in the product is not sufficient. Most SRI investors I would guess feel strongly about specific issues or companies they wish to promote or avoid, so they need to be able to figure out if the fund is ok that way. Unlike politicians who are never to blame for anything, companies are never perfect. Indeed, as fact sheet #2 on Social Investment Organization admits, "Social investors know there are no perfect companies." SRI investors must pick their spots and be able to act on their preferences.

Copper Mesa is probably in no fund's holdings, SRI or not, given its dodgy corporate machinations and financial condition (see this post on StockHouse and the TSX delisting announcement). After all, it is investing (I doubt any SRI fund screens out companies for making too much profit, an inference I make based on the prominent presence of Canadian banks amongst top Canadian SRI fund equity holdings).

However, bigger, successful companies like Barrick Gold may be more problematic. It has attracted criticism at MiningWatch Canada. Since Barrick is a large company we are fortunately able to find Barrick among the top 25 holdings of the Acuity Social Values Canadian Equity Fund (see latest March 2010 Quarterly Portfolio Disclosure). Investors should be able to see all the holdings to decide for themselves whether the fund is acceptable or not with Barrick in it.

The SRI sector, especially given its avowed aim, needs to apply its own principles to itself and adhere to a higher standard of transparency and disclosure.


Ron Robins said...

Good comments. Since it seems one can get reasonably good diversification with a portfolio of 10-15 stocks, I'm surprised that more ethical-SRI investors don't just simply analyse their personal values and then with the help of a broker, find stocks that more closely mirror those values. Also, they'll find their transaction costs a pittance compared to the MERs of funds and thus their long-term returns potentially higher.

I believe what stops investors from doing this is that they are afraid of their advisors--who often can, or only, want to sell them funds, not stocks--and they don't know where to begin.

I've been following ethical investing/SRI for over forty and have a significant background in the investment industry.

In 2001, I founded a site to educate investors about ethical investing. It's now one of the foremost global sites on the subject. It's also Canadian based. It's at http://investingforthesoul.com/

Best wishes, Ron Robins

Ron Robins said...

Here's a direct link to my site


Again good luck to your readers. Ron Robins

CanadianInvestor said...

Ron, from the quick glance of a ferw of the SRI mutual funds it seemed they followed the usual practice of charging 2+% management fees, which as you say, would knock the investor's net return down considerably.

Another prblem with many advisors is that they are only licensed to sell mutual funds and cannot seel or advise on stocks.

CanadianInvestor said...

Ron, ps like your site and have added it to my links

Ron Robins said...

Thanks for your kind comments and adding my site to your links.

Again, best wishes, Ron

Wikinvest Wire

Economic Calendar

 Powered by Forex Pros - The Forex Trading Portal.