This form of investing works on the basis that the fund manager or investor either uses positive, negative or restricted selection. What this means is they either seek out companies or countries that are having a positive impact on the environment, community or the world and its people or they avoid investments in anything they consider “bad” such as military, arms, tobacco etc. A restricted investment manager will invest in companies that are primarily “good” but may have some questionable divisions within the strict context of ethical investing.
There is some confusion as to its origins with some claiming it was originally designed to attract money from the Vatican and other religious organisations and some specifically suggesting this type of investing was directly descendent from the Quakers.
Whatever its origins it is becoming more and more popular in recent years with increases in inflows in the US at 22% and almost 10% of all money invested in US mutual funds* now invested in the Ethical/sustainable or social responsible investment funds.
Socially responsible investing also has its mark in history. One example is in South Africa large companies were without external investment for nearly two decades resulting in 75% of businesses forming a group which had a huge impact on ending the apartheid government in South Africa.
In my 15 years advising clients I can count on one hand the amount of clients who have asked for this type of investment. Some clients were aware of it by name but the others simply wanted something like it but didn’t know it existed.
All of these clients felt the “karma” would do both them and their investment returns good. From analysis they aren’t completely correct. Going on the Karma theory alone won’t swing it for you, you still need to pick a decent fund manager and be in the right sector, also just because there is a feel good element to it does not mean you can throw basic investment principles out the window. You still need to spread your investment and try and get the right balance.
Using a thematic approach, if used right for your ethical/sustainable investment would have proved popular over the last few years. For example if you had of invested in “water” or more specifically companies directly related to the water industry you would have had exceptional returns. You would have received growth of just under 150% over the last 5 years from the Lyxor World water fund.
Looking at socially responsible investments which invest in global equities I shortlisted 16 funds. Over a 3 year period only 3 of these funds managed to beat my benchmark (which was the MSCI world index).
Aviva had two out of those 3 funds but unfortunately their very short term performance has slacked off.
Robeco was the other fund and has remained consistent and they are investing with a further “sub-theme” to world markets in that they are exposed to Healthy Living stocks. These funds would have given you returns of just over 40% in the last 3 years. I am not sure if it is fair to compare that return to the best performing “non-Karma” fund but that fund provided 63% growth over the same period. (seilern investment mng)
Overall if somebody is looking for a broad based option from an Irish life company Aviva have a good range of different types of socially responsible funds, but if a client of mine wants to really get to pick and choose I would be directing them towards a platform where they could access over 100 funds in this field. With that range of choice it is feasible you could design a well balanced portfolio at a risk level comfortable to the client.
*a mutual fund is where a group of people brought together by an investment house or life company pool there money to create a fund and a fund manager invests that money on their behalf within the rules of the fund. In Ireland we call them unit linked funds.
Below is the link to the interview I did this morning with Ian Guider on breakfast business on Newstalk. If you click on the play button on the right and scroll forward to 7 minutes