It pays to be bad

Whether you can make money out of responsible investing is not a fair question to ask. The answer is simple. You can. But can you make better, more sustainable returns by doing the wrong thing and ignoring the ‘responsible’ filter?

It pays to be bad


Over the past 12 months or so, the investment strategy known as ethical, socially responsible, sustainable, SRI, CSR, ESG etc. has had a resurgence with specialist fund launches and expanded distribution agreements.
As with every fund management trend, the rating agencies are not too far behind with Rayner Spencer Mills Research launching its own fund and SRI rating services last year sandwiched in between a distribution deal announced by Premier and a new specialist fund launch from Hermes.
In contradiction to my opening comments, the Hermes Global Equity ESG fund is up an impressive 14% in the past six months. 
So does responsible investing pay?
This is a question that Credit Suisse raises in its Investment Returns Yearbook 2015, describing responsible investing as “an important and growing area in the investment management field”, adding: “It also provides evidence that corporate engagement can pay, whether the focus is on environmental and social issues or on corporate governance”.
Its premise is “investors are increasingly concerned about social, environmental and ethical issues, and asset managers are under pressure to be responsible investors”. The examples it focusses on are institutional investors who have the time, resource, experience, skills and ability to monitor how responsible the underlying investments actually are.
The conclusion it reached? Sin pays. But does it pay in the retail world? I am not convinced it does.
Two data points does not make a trend so it was perhaps disingenuous of me to use Pioneer and Hermes as examples of a broader, recent change in investor behaviour.
Yet it is not an investment trend that we are hearing a lot about, from fund managers, fund buyers or strategists – I do not remember reading too many lists of things to look out for in 2015 including a jump in demand for ethical investment solutions.
Retail investors often follow institutional investment trends with a time lag of at least six months but most retail investors are more likely to jump on a bandwagon if they can relate to it and they can relate to sin, or the investment strategy with a strapline of ‘booze, baccie and bombs’ in this case. 
Credit Suisse cites the example of the Vice Fund – recently renamed the Barrier Fund – a US fund only available to US residents – that invests in, as it beautifully says, “industries with significant barriers to entry” that include the tobacco, alcohol, gambling and defence/aerospace industries.
The report’s authors, Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School, wrote: “Investments in unethical stocks, industries and countries have tended to outperform. For those for whom principles have a price, it is important to know the likely impact screening may have on both performance and diversification.”
However, the Barrier Fund’s fact sheet shows a calendar-year return for 2014 of less than 1% compared to the S&P 500 giving investors 13.7% leading to my own conclusion that I am not convinced that it does pay, in an institutional or a retail world, as a standalone investment proposition – an outcome-based investor has plenty of alternatives to choose from. 
As ever, I am happy to be proved wrong, but I’ll stick with sin for a little while yet.


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