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Ethical investing: A more intelligent way of investing

Are ethical funds the next fad after tech funds or are they something different?

Saturday, March 17th 2001, 4:34PM

by Philip Macalister

Principles or Investment Performance?
Global Responsibility Fund

Tower Managed Funds

Ethical or socially responsible funds are the hot product at the moment, with two more hitting the New Zealand market last week, and more in the pipeline.

The one question people are, quite rightly, asking though is this: Are managers rolling out hot product to take advantage of a fad, or are SRI funds something else?

The question's interesting, especially if you cast your mind back a year ago to the flood of tech funds that hit the market.

It should come as no surprises that the managers and promoters behind these new funds see them quite differently to tech fund mania.

For one their returns aren't so spectacular. To date the evidence that has presented suggests that investing into SRI funds will give you a return similar to benchmark indices, or maybe slightly above. The real benefit these funds provide is that they are a way of aligning an investor's personal values with their financial goals.

Guardian Trust Funds Management managing director Anthony Quirk says there is certainly a growing interest in this type of investment.

While the evidence is only anecdotal in New Zealand at this stage (as there haven't been many investment options in the SRI area), overseas experience shows that SRI is becoming mainstream.

Quirk is firmly of the view that SRI funds are quite different to tech mania.

He says each type of fund is driven by two different dynamics.

One of the catalysts for technology funds was the move to industry sector based funds. This trend, according to a number of speakers at last week's IPAC investment conference, will accelerate this year.

Performance was obviously another driver of the tech fund mania last year.

With ethical funds the drivers are more about a different way of investing an equity portfolio.

Storebrand senior vice president Carlos Joly says ethical funds aren't sector funds as they invest in a range of industries.

He says it is very hard to pigeon-hole SRI funds. For instance Storebrand's offering, which Tower Managed Funds is using as its underlying fund, is style neutral and as a best of sector fund it can invest in any industries (except for tobacco and land mine manufacturers).

"I wouldn't want this (fund) to be defined as any one particular style," he says. "It is style neutral with maybe a bias towards growth."

Joly says SRI is a "more intelligent way of doing a global equity fund."

In his mind the Tower SRI fund is just a global equity fund, and as such it uses the MSCI index as a benchmark, as opposed to creating an index to suit a purpose.

"Ethical investing is more a long term investment style, if anything," IPAC Securities general manager David van Schaardenburg says.

He says one of the big differences between sector and ethical funds is that the latter is generally more diverse.

As tech fund investors have found out when they put their money into an industry sector they are going on an unrestrained roller coaster ride. That is there is nothing to smooth out the ups and downs. The other side to this observation is that timing is so important.

If you get your money into an industry based fund before the sector runs you can capture all the upside, however if you are too late you will miss out on the gains.

Ethical funds tend to hold a greater range of stocks, therefore providing diversity and some added comfort.

What's interesting about the funds that have been rolled out to date is that they all take a different approach to both their SRI screens and in some cases their markets.

For instance Tower's fund is a global equity one, while Guardian Trust's invests in companies in Australia and New Zealand.

Van Schaardenburg says one of the things about the funds which have come out to date is that they are very diverse offerings.

He says managers all have different ways of screening companies and one of the things which is likely to happen over time is that the screens will change.

Also he notes that there are companies which are popular with ethical managers, and there are some like The Body Shop, tend to be a must-have in most ethical portfolios.

Van Schaardenburg says he is not yet sure what ethical funds add to a portfolio from a risk and return perspective.

"I'm not anti them," he says. "It's still an open debate what roll they have from a portfolio perspective."

Quirk says that ethical funds are here to stay and they are not like the tech funds we saw last year.

"(They're) certainly sustainable, it's not a flavour of the month thing," he says.

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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