Written on 27/02/2015
Is it really for your portfolio though? This is the object
of this short story.
I am basing this on this brilliant new study by some London
Business School professors: Elroy Dimson, Paul Marsh and Mike Staunton.
They tried to look at portfolio of socially responsible
investments returns over the long run and try to find out if:
1)
They did better than a portfolio of bad
investments
2)
If not, what was explaining that vice was better
than virtue
To cut the suspense short (because I know you
want to know), there is no proof that socially responsible does better than
vice. On the contrary, there are more studies showing that greed was better.
For instance: the Vice Fund ($250m AuM).
But WHY ?
In his book called The
Recession Proof Portfolio of Booze, Bets, Bombs and Butts (I am not
making it up), writer Dan Ahrens and other similar authors explain several
reasons why vice can perform better:
-
Vice companies sell products which have a steady
demand, regardless of economic conditions. People still smoke the same in boom
and recession times.
-
There are fewer companies operating in each
segment, driving competition lower and boosting pricing and margins. Or these
businesses are looking so sinful that only few entrepreneurs are allocated
capital to invest. For instance, starting an anti-personal landmine
manufacturing company or a bank lending door-to-door at 3000% interest to
people with no jobs may not be your first idea in mind
-
If enough investors avoid “sin” businesses, this
depresses share prices, creating opportunities for some investors to buy cheap
securities and get future higher returns: these heartless investors are
compensated for the extra risk of owning these securities.
For instance, tobacco stocks
started outperforming handsomely in the 2000’s: their valuations were depressed
and most importantly, they had finished settling legal bills with plaintiffs
(who complained that they did not know that inhaling the smoke of something
which just burnt is not a good idea). From low valuations, they rose throughout
the last 15 years and offered spectacular returns.
Where am I going with it?
Many asset managers ask clients if they want to place investment
restrictions on their accounts.
This is a very delicate subject because I can understand
fully why someone would not want to see one’s capital being lent to sinful
activities. After all, these companies strive to kill their clients over the
long run.
However, the clients may not have thought about the
following points:
-
The sinful sectors can be determined
arbitrarily. Guns, alcohol, tobacco, adult entertainment, betting. What about
pharma companies sending used drugs to Africa? Utilities using dirty coal to
produce power? What about companies using suppliers who do not respect workers’
rights*?
-
Sinful sectors are heavily taxed: the State
coffers fill faster with more sin (the State is an accomplice of your vice)
-
Sinful stocks could be contrarian ideas offering
higher returns over the medium-term
-
Investing in socially responsible companies may
contribute to allocating too much capital to inefficient companies, resulting
in lower returns for you
-
Shutting out entire industries can hurt your
portfolio diversification and therefore your performance.
Either way, there are good arguments to invest in both
strategies and therefore it is possible to have a good comforting conversation
with a client.
PS: here is an interview of the manager of the Vice Fund. He
is a keeper.
* Domini Social Investments was one of the pioneers of
social investments. Their website is here: https://www.domini.com/
Their US flagship fund has a 5% stake in Apple.
Apple’s assembler in China is Foxconn. A couple of years
ago, its employees started to demand better conditions and pay. Some even
committed suicide by jumping from the top of the factory.
This is how Foxconn answered to these “fair” demands:
> If experienced companies get it wrong, how can a single
investor navigate in these waters?
No comments:
Post a Comment