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May 2, 2005 |
By Mark Evans
Canada’s investment community is feeling a lot more upbeat these days, and as often happens when the forecast gets sunnier, financiers are more open to
considering less-mainstream investment options and a wider range of vehicles.
Which in turn means ethical investments are gaining mindshare.
Bob Walker, vice-president of sustainability with Ethical Funds, which has 12 funds and $1.8 billion under management, said ethical investing is
poised to grow because many people have lost faith in the integrity of stock markets and of financial information in the wake of scandals at WorldCom,
Enron and others.
“There is growing interest,” he said. “People have been sitting on the sidelines, but that’s changing now.”
But for investors looking to assign funds, one of the biggest challenges is figuring out what “ethical investing” actually means.
Is acting ethically simply a decision not to purchase shares of companies involved in so-called “bad” industries like nuclear power, alcohol, weapons,
tobacco and pornography? Or is it more complicated than that?
The confusion comes, in part, from another movement: socially responsible investing, or SRI. That term is often mentioned alongside ethical investing when financial types gather to gab. Which leads many investors to ask, “What’s the difference?”
In a nutshell, ethical investing involves the purchase of stock in companies not involved in “bad” industries. SRI, meanwhile, is a little more complex: it focuses on investments in firms with good ethical, social, moral and environmental records or programs.
Keith McLean, a partner with I.G. Investment Management in Prince George, B.C., and portfolio manager with Investors Group’s Summa-C Fund, said definitions within the ethical investment category can differ depending on a person’s “go or no-go” approach.
One investor, he said, may think mining is bad because it damages the environment, while another investor would not hesitate to buy shares if a mining company cleaned up its sites.
Regardless of how you define ethical investing, interest in the area has been growing in recent years as more people become concerned about issues such as the environment. Investors still want to make money, but they also want to do so in responsible ways.
GLOBAL ETHICS
There are many ways to participate in ethical investing. You can invest directly in individual companies or purchase a suitable mutual fund. It is estimated there are more than 600 ethical funds globally with assets under management of more than US$127 billion.
In Canada, ethical funds are offered by Acuity Funds, Investors Group, Ethical Funds, Meritas Mutual Funds, Desjardins Funds, Generations Ethical Funds, Great-West Life, Mackenzie Financial and Strategic Nova, among others.
For investors looking for more information before they take the plunge, many Web sites offer education, resources and advice (see sidebar). Like any investment decision, you should approach ethical funds with a good idea of expectations and goals. Just because a fund is “ethical” doesn’t mean it will be all things to all people. You should get a clear idea about whether a fund is focused on growth, income or value.
You should also understand how the fund defines “ethical.” Some, for example, are focused on environment and alternative-energy investments, while others, such as the Summa-C Fund, concentrate on growth-oriented companies that pass specific investment criteria.
FINANCIAL PERFORMANCE
The core challenge that has always dogged the ethical investment sector is the belief that a conscience results in weak financial performance. Not surprisingly, the ethical industry claims this notion is a myth, citing studies which have shown ethical funds have performed as well as major stock indexes over the past 10 years. As a result, the ethical investment industry spends considerable time educating financial planners and investors.
“There is a real dearth of brokers and planners interested in this area at the moment,” said Ron Robins, a former investment banker who runs workshops
for investors and advisors called Investing for the Soul.
“For many of them, there are two main reasons: it’s a new field and they have to get [knowledgeable about] new products, and most planners and brokers
go with the familiar — get the commission and that’s it.”
One of the best-known tools used to track the performance of ethical companies is the Jantzi Social Index (JSI), a market capitalization-weighted index
modelled on the S&P/TSE 60. It consists of 60 Canadian companies which meet a variety of social and environmental screens. From its inception in January
2000 to Dec. 31, 2003, the JSI rose 6.7 per cent, while the S&P/TSX 60 fell 1.75 per cent and the S&P/TSX Composite Index gained 3.7 per cent.
The American version of this is called the Domini Social Index. It consists of 400 ethical companies and includes Cisco Systems, SBC Communications, AOL
Time-Warner and Merck & Co.
TAKE THE LONG VIEW
One valid knock on ethical investing, though, is that it may not perform as well in the short term, said Summa-C Fund’s McLean. This is particularly true
in troubled times, he said, during which the defense industry does well and people tend to drink and smoke more. Ethical funds struggle because they do not invest in those areas.
But McLean said in the long-term, ethical funds will perform as well if not better than major indexes, if managed properly. “The average investor can look at the long-term track record and see that over a 10-year period, the Summa-C Fund is one of the top growth funds in Canada, versus its peer groups and index,” he said. “Ethical investing is not detrimental because it’s ethical. Over the long term you can have solid performance.”
The Summa-C Fund is the largest ethical fund in Canada, with assets under management of more than $2.1 billion. It is a growth fund with a portfolio
that includes blue-chip companies such as Research in Motion, Shoppers Drug Mart, Royal Bank, TD Bank and Cott Corp.
McLean said Summa-C screens the largest 125 companies in Canada on an annual basis to generate a list of potential investments. Of this list, 23 companies
are currently ineligible because of their exposure to alcohol, defense, tobacco or pornography. Some of the firms on that list include uranium producer Cameco and brewer Molson.
“It is a very manual process,” McLean said. “There are various sources we use — regular broker research and people who provide SRI research. We go
through this information, talk to companies, go through proxy circulars, and talk to other SRI investors on where they stand on a given issue. There is no… point scoring system; it is a relative ranking system.”
While the Summa-C Fund is focused on large-cap companies, McLean said exceptions are made when a firm is a natural fit. A good example is Zenon Technologies, which makes water-filtration systems. “A company like Zenon is really too small for Summa-C Fund if you look at the size of the fund and how much stock we need to have a material position, but we are one of its top investors because these guys are doing something materially positive in the world, and we want to be part of that.”
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