Wednesday 27 February 2013

Good Corporate Environmental, Social & Governance Performance is Good for Investors

Worth reading - a couple of studies suggesting that companies which rate highly on ESG factors will outperform financially and on the stock market.

1) The Value of Governance by professor Anita Anand of the U of Toronto on the website on the Canadian Coalition for Good Governance - "there is a strong consensus in the literature that corporate governance is linked positively to firm value"
2) The Impact of a Corporate Culture of Sustainability on Corporate Behaviour and Performance by professors Robert G. Eccles, Ioannis Ioannou, George Serafeim of Harvard U. - "High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources". In true academic cautious fashion, they stop short of claiming that the adoption of ESG policies causes the outperformance, as opposed to merely being associated with it, which is what they emphatically demonstrate. However, the study shows that the High Sustainability behaviour preceded in time the outperformance, which is highly suggestive of causality.

Unfortunately for those looking for investment leads, there is no list of the 180 companies they found to be in the High Sustainability group.

Worse, the intricate and extensive rating process to figure out which companies are high-ESG is beyond the reach of average joe investor. We cannot hope to collect the data, which comes in part directly from the companies and in part from laborious combing through company reports. Nor can we afford to buy the data from the various specialized ESG rating shops like those on page 13 of this Bloomberg slide pack or Bloomberg or Thomson Reuters. And it's not provided by discount brokers or on free stock search websites.

Our only recourse is to buy, or look at the holdings of, ESG-based ETFs like iShares Canada's XEN or the various US-based ETFs such as those in ETF db's Socially Responsible category. Since the message of ESG studies seems to be that high-ESG pays off on average over a long period of years, for small investors an ESG fund with many holdings is probably a better option. As usual the problem with these specialized ETFs is that their MERs are higher (by 0.4% or more) than plain old index funds, which will put some people off.

Worse still, as the big institutional investors round the world have become convinced that ESG pays and are making it an integral part of their investment selection process (e.g. see the Canada Pension Plan Investment Board blurb on why and how they do ESG), individual retail investors have so little enthusiasm for such ETFs that one of them - Pax World's North American NASI - is closing in mid-March! XEN itself has a puny $18 million in assets despite being in existence since 2007 and outperforming the gigantic market benchmark iShares TSX 60 XIU by almost 0.5% on average per annum after fees (1.91% vs 1.44%) over the past 5 years.

Friday 22 February 2013

Gold titillation

For all the constant chatter about gold, I had never seen the real thing in such vast amounts - the Bank of England's gold vault in a video. The scene is so weirdly banal. The weirdness is only accentuated by the incoherent  explanation of the reason that the BOE keeps gold.

Thursday 21 February 2013

A Tipping Point in the CPP Expansion Debate?

Surprise and initial disbelief was my reaction upon reading the headline "Canadians should be allowed to contribute more to CPP to ‘reignite a culture of savings,’ urges CIBC chief" yesterday in the Financial Post. But it's true - the head of one of Canada's banks has come out in support of an idea that has been portrayed by some as the stupid notion of an ill-advised anti-business left-wing labour movement but which actually makes a lot of sense (as I have blogged about comparing CPP to RRSPs and the like, in relation to retirees' needs, comparing to the proposed PRPPs). It is quite significant when a major bank head publicly expresses support. After all the banks make a lot of profit from RRSPs, mutual funds and would do so from PRPPs that are the private sector alternative to CPP. So kudos to CIBC and CEO Gerry McCaughey for saying something that may not be in their narrow best interest but which is good for Canada and average Canadians.

A fine but critical point of potential disagreement with what McCaughey said is that the voluntary participation in the expanded CPP should be made the default option i.e. people should be automatically included though they could opt out if they deliberately chose to leave it. That way, just about everyone would be in it. To offer participation as a voluntary opt in, where you have to take action to join, would be next to useless as too few people would join. People need a Nudge as Thaler and Sunstein tell us in the eponymous book.

Disclosure: I own bank shares directly and in ETFs (and so does just about every Canadian in their equity mutual funds or ETFs) and I will be getting CPP, though not any expanded benefits if it is expanded on a pre-funded basis as I believe it should be done.

Tuesday 19 February 2013

Pure Dead Brilliant!

Though Scots have a wonderful way with expressions and a great sense of humour, I'm pretty sure the one who first came up with "pure dead brilliant" to describe something fabulous were not contemplating death. But the expression fits perfectly to memorial diamonds.

Yes, Virginia, technology has moved forward and lockets of hair of a dear departed are passé. Get your hair or your ashes turned into a diamond. (no joking, it's a real business as the innovative first company to offer this unique product LifeGem has been joined by others) Forget the complications and uncertainty of reincarnation. Since diamonds are forever you can be present forever.

It's convenient for the living too. No messy ashes that could spill. No having to visit a far away grave, the loved one is ever present on your finger. Just give him or her a wee affectionate rub once in a while. And it's very discreet too, unless you want to brag how the person was a cut above the rest. Not only that, but one person can easily be used to make several diamonds - very convenient for each member of the family to get their very own piece of grand-dad.

Since any dead thing made of carbon can be turned into a diamond, consider also the mixing & matching possibilities - gran and grand-dad united forever, mom and her favourite cat etc.

Perhaps the only downside is the obvious one mentioned by lawyer Ian Hull, on whose blog Toronto Estate Law I found this idea. You could lose the diamond! (Sure hope there weren't any amongst the gigantic heist today at Brussels airport).

Wednesday 6 February 2013

Fundamental vs Cap-Weight Portfolio: Still Very Close after 2 and a Half Years

Early in 2010 I became convinced that indices based on fundamental accounting numbers made more sense as an ETF investment strategy than the traditional indices based on market capitalization. The research seemed convincing but would real world investing see the same results I asked myself. To try answering the question, in June 2010 I created two parallel portfolios with the same initial pretend capital of $100,000 and the same asset class breakdown to pit ETFs based on each type of index in a head to head battle.

Past updates on the contest:
  • June 2010 - initial post with all the portfolio rules
  • August 2011 - Cap-weight portfolio ahead by 0.4%; both portfolios up about 10%
  • March 2012 - Cap-weight portfolio ahead by 0.07%; both are up 16% in total
Today (see bottom of this blog page for the Google spreadsheet with details of the current portfolio):
  • Cap-weight still ahead in total by a slight 0.5% 
  • Both have gained over 22% since inception
  • Every asset class / ETF holding has made gains
  • Asset class gains are unequal as expected but none has yet gone beyond the automatic rebalancing rule of a quarter deviation over/under its initial share (e.g. a 5% holding going above 6.25% or below 3.75% of the total portfolio)
  • In some classes the cap-weight ETF is ahead, while in others it is the fundamental index ETF
Recent Substitution trades
Bottom line
  • The jury is still out with such a tiny total cumulative difference, though I am a bit surprised the fundamental side isn't pulling ahead. 
  • Having a portfolio with a mix of asset classes really works well - note how the total portfolio is up 22+%. By comparison, the TSX Composite Capped index is up almost the same at 21%, almost the same but the ride has been a lot smoother with both our portfolios

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