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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Personal Beliefs Don't Belong In Your Retirement Account

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

  • edited September 2015
    What if some of us believe the value of your money is in what it can promote in the world as opposed making every last possible dollar. I believe you seriously shortchange people that invest based on personal beliefs. I personally invest in the Eventide family of funds which follow Christian values. I personally would not sell my soul to make some extra profit.

    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
  • The Amana Funds certainly appear to have a good track record also.
  • "What if some of us believe the value of your money is in what it can promote in the world as opposed making every last possible dollar."

    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.
  • edited September 2015
    I do the best I can with this whole investing thing, realizing that there's no clean money, anywhere. I use my own filters, rather than an explicitly SRI fund. I find that they are scewed toward either conservative ethical priorities or liberal ethical priorities. It's more challenging, and more satisfying, to do it myself. And then to remember that the best I can do is still soiled, one way or the other. It's the very nature of capitalism. It's true that if you want to make as much money as possible, you will need to put your conscience on a shelf and just not use it. Anyone can pretend to divorce money from ethics.
  • msf
    edited September 2015
    "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.)
  • "The freedom to invest anywhere does not mean one has the ability to do that well."

    Now that, msf, is worthy of Mark Twain. Well said!
  • jeez, tell it to Todd Ahlsten and, as mentioned, Nick Kaiser.
  • edited September 2015
    This is a rather tiresome old-fashioned view on SRI and ESG--environmental social and governance--based investing that has been refuted by academic evidence. Click here: https://institutional.deutscheawm.com/content/_media/Sustainable_Investing_2012.pdf
    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
  • I really disagree with Sorrentino's commentary. The fact is that investors CAN do well by doing good. A case in point is Vanguard FTSE Social Index VFTSX versus VFINX. There are many, many more examples. Yes, there are plenty of poorly-managed SRI and ESG funds, but that can be said for all funds in general.
  • edited September 2015
    Maybe it's just me but I don't feel the need for, nor do I want, a fund company deciding what is SRI or ESG compliant. I like to believe that I am capable enough to do that on my own.
  • I think there's a key factor that isn't talked about but explains a lot of what's going on. When people's investment choices are changing at the same time people's spending habits are changing then this article doesn't make a lot of sense. People are spending based on quite a few of these factors so those companies that reflect changing social preferences do better at the same time there's increased investment interest. Even more as people spend their hard earned money with companies that are faith-based, or that support the community, or that don't kill animals, other businesses are forced to change and the opportunities for investment grow. When changes in preferences aren't aligned between investments and purchases then it's a lot harder to make this article makes a lot more sense or those investment preferences have to be expressed broadly enough so they don't restrict your options too much. Otherwise, the "solar only" fund, for example, is going to struggle relative to most other things.
  • edited September 2015
    I guess I will plead "ignorance" on the topic..

    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!)
  • edited September 2015
    The thing is SRI/ESG investing has evolved so that a number of money managers no longer exclude entire industries, but seek the best ranked or behaved members of different industries on an ESG basis, realizing that consumers, the media, regulators and financiers will reward the best behaved and punish the worst. So SRI may not be as niche as investing solely in solar but finding oil companies that have the least environmental violations, are trying to reduce their carbon emissions, treat their workers and the communities they are domiciled in fairly. Also, avoiding industries is not the only solution for the SRI/ESG investor today. Engagement can be, whereby shareholders actually file resolutions to improve the ESG behavior of a company. That's why this attitude towards SRI espoused in the article seems dated to me. Here's an example of how one SRI manager now addresses oil and fossil fuel companies that illustrates the newer approach towards ESG:
    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.
  • I'm with Edward on this one. Show me a money-maker that doesn't somehow offend someone's definition of social irresponsibility. Blah, blah, blah.
  • @Old Joe, Seeing as you have named yourself Old Joe I assume you've reached a stage in life where you no longer see the world painted ethically in black and white. There are many shades of grey that exist on an ethical continuum, and what that continuum is and what is acceptable ethically will vary from investor to investor. Sure, the term "socially responsible company" may be an oxymoron, but 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.
  • Enron was the largest US wind power company though...
  • "you've reached a stage in life where you no longer see the world painted ethically in black and white." Nicely put.

    "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!
  • Hi Guys,

    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.
  • edited September 2015
    @MJG, Thanks for reading the research. One important distinction, though, is while the research from Deutsche Bank did indicate that SRI investing was largely neutral to one's returns, ESG investing actually led to outperformance. The reason for the distinction is that the older style of SRI excludes entire industries while the newer ESG styles ranks companies within industries and then tries to buy the ones with the best environmental, social and governance records. So for instance oil stocks are not excluded but only the ones with the worst ESG rankings. This many studies Deutsche Bank examined led to outperformance of the stock market, not neutral results.
  • edited September 2015

    ... the newer ESG styles ranks companies within industries and then tries to buy the ones with the best environmental, social and governance records. So for instance oil stocks are not excluded but only the ones with the worst ESG rankings. This many studies Deutsche Bank examined led to outperformance of the stock market, not neutral results.

    Ben Allen at Parnassus (colleague of Todd Ahlsten), in a Bloomberg article from a year ago, put it this way:

    "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.' "
  • @AndyJ, That's exactly right. There's a practical reason why ESG investing can work. Being an irresponsible company from an environmental or social perspective is bad for a company's brand from a consumer's perspective and bad from a regulatory perspective. So excluding those companies from a portfolio can give one an edge. We live in a highly mediated age where bad news spreads fast and consumers have a lot of choice in many areas. A company that behaves badly--toxic dumping, underpaying workers, excessive bonuses for CEOs--will ultimately hurt its brand image and possibly face litigation and regulatory fines. Meanwhile, companies that have good ESG rankings have a positive brand images and that will lead to greater appeal to consumers, increasing the company's bottom line. In fact, saying ESG factors don't matter is almost like saying that consumers don't matter or that they don't care about these issues when increasingly many do. It's also like saying that regulators who look at these issues don't matter. Of course they do.
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