FYI: (I couldn't agree more, just remember the four B's --Booze , Bombs, Buttts & Broads, many times can make you a lot of money.)
When investors utilize SRI and other emotionally charged strategies, they do more harm than good because those strategies lack the following attributes:
• Diversification: The "Golden Rule" of investing is to maintain diversification at all times. Confining stock selection to only those that meet emotional guidelines can leave a portfolio exposed to unnecessary risks.
• Higher Expected Returns: Due to several fund mandates to avoid sin stocks, these equities are often cheaper on a valuation basis than other stocks that get crowded by the large fund managers.
• Effectiveness: Owning a stock of a company has little to no effect on its revenue generation, earnings, dividend safety, and/or compensation for management. A stock is nothing more than a claim on a percentage of the equity for a company.
Regards,
Ted
http://www.marketwatch.com/story/personal-beliefs-dont-belong-in-your-retirement-account-2015-08-31/print
Comments
If you do not believe your ownership of stock in a company amounts to anything other than the claim on partial ownership of equity in the company, I recommend you read the following article by the fund managers at Eventide: http://eventidefunds.com/faith-and-business/blind-spot/
What a disappointing post!
Jim
You know, that's great. I think there is an aspect of some healthcare companies that fascinate me and that I own longer-term because I want to be a part of all or aspects of what that company is doing. Illumina (ILMN) is one. That said, people have to have patience if they're going to go this way - I mean, so many people (including some of the largest hedge funds) piled into solar and basically have been obliterated. I mean, look at SUNE.
If one believes that solar is the way of the future, hopefully those people have the patience to wait out that long-term view. In other words, if you invest on beliefs in things that you think could do good, you will still likely have your beliefs and patience tested more than a few times along the way.
IMHO, a post child fund for being too early is New Alternatives Fund (NAEFX). Started in 1982; if it isn't the first fund dedicated to solar and alternative energy, it's pretty close. Usually rated 1* (it currently has a 2* rating). I haven't determined whether that's because it was really early with what was then very costly technology, or because it couldn't pick better holdings, or both.
Just this year it finally started a noload share class. But its extra 0.25% 12b-1 fee means that you'll wind up paying the equivalent of the front end load if you hold it a couple of decades.
Definitely not an endorsement of this fund; just pointing out that it has been possible to buy into these ideas for decades. But if you did, you needed a whole lot of patience. The technologies seem much more viable now.
The OP article makes the usual assertion that by definition any restrictions on diversification diminish profits. It doesn't address studies that show one can do well by doing good.
Nor does it explain why, if unconstrained investments should do better, unconstrained bond funds have such a lackluster record. (The freedom to invest anywhere does not mean one has the ability to do that well. Most managers are better sticking with what they know best.)
Now that, msf, is worthy of Mark Twain. Well said!
A key excerpt from this report is the following:
"100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly....
89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance. Here again, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years)."
In fact, I think the idea that "personal beliefs don't belong in your retirement account" actually is a reflection of the personal beliefs of many of the authors who routinely bash SRI/ESG without looking at the academic evidence, revealing their own biases. The fact is trillions of dollars are now invested globally according to some sort of SRI/ESG principles with little negative effects and in many cases positive ones:
fa-mag.com/news/sri-assets-up-76--since-2012--study-says-19953.html
Apparently "social investing" means shunning fossil-fuel producing energy companies. Yet, all the Top 25 holdings in VFTSX are massive CONSUMERS of fossil fuels, aren't they?
Virtually all MNCs who manufacture products, operate globally using an import-export business model (siting their production in the cheapest locale, then exporting to 1st world nations) rather than manufacturing locally which would minimize consumption of fossil fuels. The import-export model relentlessly consumes untold amounts of fossil fuels as product laden containers are hauled to the developed world, and empty containers are then returned to 3rd world production facilities.
I see ethical drug makers are well-presented in SRI screens. These companies routinely engage in price-gouging in the USA, and charge much less for the identical drug in other countries. Are those practices "socially responsible"?
Banks seem to be well-represented too. Of course, the banks engaged in an orgy of shoddy underwriting practices which permitted the mortgage crisis/Great Recession.
I see PepsiCo is a top VFTSX holding. Along with Coke, their products are among the greatest contributor to diabetes in this country and around the world. Socially-responsible? -- I guess it helps the business of those "socially responsible" diabetes-drug makers -- a "virtuous circle/feedback loop" if ever there was one.
[edit: Many of the tech companies ID'd as 'Socially responsible" engage in extremely aggressive & contorted accounting fictions designed solely to move 'accounting income' to offshore locations --- thereby legally dodging their tax bills (again its "legal" because they bribed legislators and hired lobbyists to make it legal). Is this "socially responsible" or is it sneaky, greedy, and serve to drain govt revenues, which impedes spending on "socially responsible" infrastructure, and health programs...?...]
My point -- all corporations are greedy b@$t@ard$. They conduct their operations, to one extent or another, in socially IR-responsible --albeit legal -- means. And often what they do is legal because they pay lobbyists and bribe legislatures (here and abroad) to turn a blind eye.
All business enterprises (of any scale) are "dirty" to one extent or another.
As far investing based on "religious" concepts --- I'm no clergy, but a certain philosopher/man of god, once stated its easier for a camel to go through the eye of a needle than for a rich man to enter into heaven. That philosopher would probably have suggested giving your money to the poor and skip investing altogether. (A philosophy which I certainly would NOT advocate!)
waldenassetmgmt.com/climate-change-risk
Click on the link on the left side of the page entitled "Fossil Fuel Exposure in Walden Portfolios." No other way to get to this link.
"you have to admit that there are some companies that seem to behave worse than others, that the Enrons of the world are a little less seemly perhaps than the Ben & Jerry's."
No argument there!
Like Edmond, I don’t have a horse directly in this race. I select the mutual funds that I own without a Socially Responsible Investing (SRI) criterion. My uniformed overarching belief is that any additional constraints imposed in the selection process reduces the candidate fund list, and could potentially harm performance.
Thanks to the excellent reference that MFOer LewisBraham provided, the accumulated research indicates that my fears were imaginary. In that report, the authors conclude that 9 academic studies find neutral or mixed performance results, and even one instance of outperformance. The models suggest that outperformance is a doable goal from a theoretical perspective, but that optimistic assessment is not executed practically by fund managers. See page 61 for these conclusions.
So, adding a SRI criteria in the selection process does not necessarily hurt returns, although, as in all investment decisions, it must be executed prudently. It might not do an investor any good, but it will not break the back of his portfolio either.
I have a nearby neighbor who actually worked on a solar farm in the late 1970s. He is not a fan of these farms. At that time efficiency was poor. The farm was located in the Southern California desert region. His negative anecdotal assessment was not base on the relatively poor energy conversion efficiency, but rather on the excessive water requirements to keep the solar panels clean. That solar plant has shuttered its panels and has been abandoned.
Solar panel efficiency has improved remarkably since those early days. But even after 40 years and countless tears from working the problems, our primary energy sources have not changed very much. How much? Here is a Link to a superior summary generated by the International Energy Agency:
http://www.iea.org/publications/freepublications/publication/keyworld2014.pdf
I invite you to scan this informative report. On page 7, the document shows the world’s Total Primary Energy Supply (TPES). The presentations graphically display energy consumption from the early 1970s to 2012. A pie chart comparison of the energy contributors in 1973 and in 2012 allows a rapid assessment of trends.
After decades of resourceful trying and skillful engineering, coal, oil, and natural gas remain the world’s primary energy sources. These 3 sources still provide over 80% of the fuel shares. Meanwhile, in the “other” category (geothermal, solar, wind), its share of the energy marketplace has advanced from 0.1% to only 1.1% over this 4 decade timeframe. This is not a brave new world signal. Progress in the “other” category is painfully slow.
There will be no eureka energy source moments in the near future. The fuel sources that govern the marketplace today will also be major factors for decades. The data show that coal production has steadily risen in the last 4 decades. These “other” sources have been experimentally explored for decades and are now respectably mature contributors. Don’t anticipate major innovations or efficiency improvements.
For example, solar photovoltaic cell efficiency can be significantly enhanced (to numbers approaching 30%) by using rare element materials like gallium arsenide. But that is not likely to happen. Why not? Rare element materials are extremely costly, and more importantly, universal scale limitations exist because rare element materials are “rare” (what a shocker).
There is some hope that thin-film gallium arsenide might prove doable. Let’s hope so. At this moment Gallium arsenide costs 1000 times more than an equivalent product made from silicon. The current goal is to reduce that differential from 1000 to 100. That’s still a long way from home.
The International Energy Agency report also shows consumption and production data on a country-by-country basis. Additionally, the document provides future energy projections that just might be useful when making an investment decision. For those of you considering energy investments, this referenced report just might give you an edge.
Progress in the energy field will be made, but only slowly and with many missteps. That’s science. In that context, keep John Maynard Keynes cautionary warning in the forefront: “Long run is a misleading guide to current affairs. In the long run we are all dead.”
Good luck and good research to all MFOers.
Best Wishes.
"Call it socially responsible, but Allen says his strategy is just due diligence. 'It's not just about feeling good about yourself in the morning,' he says. 'When we're looking at two similarly valued energy companies, and one has a good track record for worker safety and one doesn't, which do we invest in? That's a no-brainer.' "