investment choices and asks what is an ethical investment anyway...
Not in my Name: Ethical Investing
by Peter Temple
It's a common jibe that you can be an ethical investor or a successful
investor, but not both. The facts show otherwise. But there is no denying
that ethical investment does restrict the choices you can make. It may
prevent you from investing in booming sector, and it may make your returns
more volatile.
There is no common agreement on what precisely constitutes ethical
investing. For some it is simply avoiding investing in shares that are
obviously
pernicious: drink, tobacco, gambling, and armaments are the most commonly
cited. Others adopt more exacting so- called 'deep green' criteria.
Investors like this only invest in companies that can be said to provide
positive benefits for humanity: food; water; heat and light; shelter;
medical care; education and so on.
You can overlay faith-based criteria onto this pattern of investing too.
Friends Provident, originally a Quaker organisation, was one of the earliest
ethical investors in the UK. Methodist organisations have also been
prominent ethical investors for more than a century. Islamic investing -
where alcohol, gambling,
armaments, pork, and companies involved in the
paying and receiving of interest are avoided – is another subset.
Ethical investors also have other decisions to make.
Some relate to the management organisation of the company in question.
Others relate to environmental and even political concerns. Does the company
conform to recognised standards of good corporate governance? Is it a major
polluter? Does it invest in areas that have repressive political regimes?
Nothing here is clear-cut. The choices can be tough.
What do you if your investment in a retailer (ethical) is taken over in a
share for share deal with a tobacco company? What do you do if your hotel
company (ethical) takes over a brewery? Is nuclear power (the cleanest
and cheapest form of energy) ethical or not? Are
wind turbines (which produce sustainable energy but create visual pollution
and pose a threat to wildlife) ethical or not?
Professional investors have a tough time with decisions like this, and many
cop out. Most fund managers subscribe, rather as they would to the virtue of
motherhood and apple pie, to vague phrases like 'constructive engagement' or
'socially responsible investing'. What this really means is that they feel
it's acceptable to invest in companies that may
not be ethical in the strict sense of the word, as long as they are trying
to improve themselves or are open to persuasion.
Another rather weak-kneed approach is for specialist funds that have to
invest in specific sectors or markets to do so 'ethically' by drawing up a
short list of preferred investments and then choosing, all other things
being equal, those that are the more ethical.
Investors wanting to invest ethically should view attempts to curry favour
like this with a sceptical eye. BP, for example, though it may have styled
itself as 'beyond petroleum', still makes its profits from extracting and
selling oil, thus contributing to pollution. Its relatively modest
investments in alternative energy do not really alter this fact.
Pharmaceutical companies may have, under pressure from activists, dropped
AIDS drugs prices in Africa but the cost of the gesture pales into
insignificance beside their muscular approaches to exploiting their
discoveries elsewhere and their market driven priorities that dictate more
marketing put behind anti- obesity and other lifestyle drugs than finding a
safe and cheap anti-malarial treatment.
An attempt to standardise criteria for ethical investing has been developed
by the index provider FTSE International. It now has an 'ethical' index
series including, for example, the FTSE 4Good UK 50.
Its specific exclusions are companies involved in tobacco, parts for nuclear
weapons, nuclear power, mining uranium, and armaments. Of the remaining
companies theoretically capable of inclusion, they must also demonstrate
that they are working towards environmental sustainability, developing
positive relationships with stakeholders and upholding and supporting
universal human rights.
Few would argue that these criteria are not important, but traditional areas
usually proscribed by ethical investors, such as drink, and gambling, are
conspicuous by their absence from the list of exclusions. In fact big oil
and pharma companies, and a couple of large brewers, make the cut.
Moreover, for FTSE, areas that many would consider super-ethical – such as
water, waste recycling and the like, are considered 'high impact' from an
environmental standpoint, while public transport is also considered 'medium
impact'.
The reality is that FTSE's index is more a measure of companies confirming
to environmental soundness, and stated support for equal opportunities and
human rights, than a measure of what most ethical investors would consider
acceptable. One can speculate on the reasons for this, but a not
unreasonable assumption would be that the criteria for inclusion have had to
be loosened in order for a representative sample of large companies to be
capable of being included in the index.
Few would question whether BP and Shell are good companies, but whether they
are suitable for strictly ethical investors is another matter. Both are in
the FTSE4Good UK 50 Index. Having said that, FTSE International does claim
that more than a third of the top 100 companies were excluded from the index
for a variety of reasons.
Even so, private investors wanting to invest ethically should probably have
no truck with indices like this, or funds based around them or tracking
them, but pursue a more distinctive approach. There are two straight
choices. One is simply picking stocks for yourself on personal ethical
criteria: the other is to invest in a fund that does it for you.
For the most part this points one in the direction of companies that are
relatively small; primarily based in the UK; where management has a
significant stake in the business; where governance is good and executive
pay modest; and that do something that you believe contributes positively
to, or at least does not detract from human welfare. An investment in
ethical stocks by and large consists of small and mid-cap growth stocks with
perhaps a few ethical large caps thrown in, although establishing the true
ethical credentials of large cap stocks is much more difficult.
Investing ethically via a fund is ostensibly an easier decision. This is an
established subset of the fund management industry and there is plenty of
choice.
According to EIRIS, the ethical investment research organisation, there are
now almost 90 ethical funds (defined in the broadest sense) available to UK
private investors, including a number that invest ethically in overseas
markets.
EIRIS figures show that in 1989 total ethical investment funds under
management amounted to £199m. At the end of 2005 that figure was £6.1bn and
almost certainly increased further in 2006. While part of the growth is
undoubtedly due to increases in the overall level of the equity market, the
growth in the number of funds, and in numbers of ethical investors, now
believed to be around 500,000 in the UK alone, suggests increasing awareness
of and interest in the topic.
Choosing ethical funds isn't as easy as it might seem.
Adding the ethical dimension complicates the decision- making process.
Choosing a normal fund requires you to balance historic performance, a view
on whether the historic performance can continue, fund charges and the like.
Add to this the ethical question - whether the fund conforms to your
personal view of what constitutes ethical investing – and the equation is
more difficult to resolve. Funds vary hugely in both performance an in the
ethical criteria they adopt.
Some are studiously vague; some use 'light green'
investing (excluding the most obvious 'bad boys'); some use positive and
negative criteria; some target environmental factors; some target ethical
and environmental; some track the FTSE 4Good UK 50. With some it is hard to
escape the conclusion that the ethical dimension, vaguely adhered to, is
simply a marketing ploy.
The best procedure to follow here is perhaps to start
with the best performers. On the whole charges tend
to be high (a 5% initial charge is typical) but these are often deeply
discounted by fund supermarkets.
Another good way of determining if a fund is likely
to be pursuing a policy broadly in sympathy with your
own ethical objectives is to look at the fund's top
ten holdings. If you disapprove of the selections, don't invest.
If you want to pick stocks yourself and make sure that they are ethically
acceptable, or have your existing portfolio vetted for its ethical
acceptability, EIRIS
(www.eiris.org) offers a paid-for service for affluent private investors
that will do just that.
Regards,
Peter Temple
For The Daily Reckoning
Our "Crash Alert" flag is still fluttering outside.
You'll recall that it was hoisted up there about three months ago. For a
long time, it looked silly. Who needs a 'crash alert' when the world is
booming?
But, just yesterday, as we were writing about the threat posed by collapsing
Chinese stock prices, it turned out that Chinese stock prices were - in the
process of collapsing. Some stocks were down the limit in Shanghai and
Shenzhen. The markets ended the day down almost 10% - the biggest drop in 10
years.
Other emerging markets fell too, emulating the Chinese example. And then,
when the tsunami got to New York, U.S. stocks were soaked too. The Dow was
down more than 500 points at one time during the trading day – the biggest
hit since 9-11.
And look at what is happening to the financial stocks.
Yes, even Goldman seems to have topped out – a company run by the smartest
financiers in the business...
perched on the biggest financial bubble of all time.
Does this mean the Chinese bubble is finally popping?
And if so, does that mean that the whole enchilada...
the whole worldwide liquidity bubble...is finally going to blow up? We'll
have to wait and see.
But we remind readers that the many lurking threats to their money are all
not equal: some are unpredictable...and others are unavoidable. Among those
that are unforeseeable are war and natural disasters.
Among those that are ineluctable are the popping of the credit bubble...and
the destruction of the U.S. dollar.
The first challenge for investors is merely to recognise the difference, for
different sorts of threats require different responses. The second challenge
for investors is to recognise the different
ways the market can do damage to them: while they
might lose a lot of money ignoring inevitable
threats...they could also lose a lot of money
chasing inevitable opportunities.
On the good side, when you speculate on the inevitable at least you are on
the right side of the trade. But, on the bad side, whether you make money or
lose will depend on your timing. "The market can stay irrational longer
than you can stay solvent," said Lord Keynes.
So, sometimes, it is better not to try to trade a trend – even if it is
inevitable. Just get in position so it won't do you any harm. You may not
get rich, but you'll still be better off than most investors.
On the other hand, there are some who say you should just ignore inevitable
threats in order to take advantage of the inevitable opportunities that
usually go along with them.
"Yes, I agree, the Chinese market is going to take a tumble. It's
inevitable," said our friend last weekend.
"But over the long term – and I'm talking about 10 years or more – China is
going to boom. I want to be a part of that boom. I want to be in it. So,
I'm willing to take some discomfort in the short term in order to
participate in the longer-term gains."
We think our friend is an optimist. By way of rebutting him, we call two
witnesses. Our first is the Ghost of '29. No economy was more successful in
the 20th century than the U.S. And never was it more successful than in the
'20s. America.....and America alone...emerged from World War I as the clear
winner. The rest of the world owed it money. Its industries were booming.
Its stocks were soaring. Its young, inventive and hard-working people were
creating new technologies and building new factories and new skyscrapers.
Europeans returned from visits to New York in the '20s like Americans now
return from Shanghai. The pace...the excitement...the commercial
activity...the liveliness...the energy – it was overwhelming. They could
scarcely believe their eyes. Many wanted a piece of it.
Over the long run, a European investing on Wall Street might have done
fairly well. But what if he had invested in the late '20s, when America's
promise and success seemed most inevitable? Just ask the Ghost of '29. If he
had invested his money just before the crash, he would have had to wait
until '56 to break even! That is, he would have had to hold on through a
Great Depression...another major world war...and practically until the end
of the Eisenhower administration – a period of 27 years! After that, he
would have enjoyed a good 10 years of capital growth – and then another
setback.
Our other witness is still living; he can speak
for himself:
"Isn't it true that Japan was the greatest success story of the post-war
period?"
"Yes...I believe that is correct."
"Isn't it also true that the Japanese made their money by selling goods and
services to Americans? Isn't it true that they realised huge foreign trade
surpluses in this manner – similar to what the Chinese are doing now? And
didn't they build up huge foreign currency reserves? And didn't the Japanese
economy boom...
especially after the Louvre agreement, when they tried to keep their
currency low by reducing interest rates and increasing liquidity – very
similar to the Chinese example now, in fact? And weren't investors so
excited by the prospect of getting rich in Japanese stocks – and I think
this includes you – that they rushed into the Tokyo market? And didn't
Japanese stocks and real estate reach an epic, zany high in January of
1989?"
"Yes, all that is true."
"Then would you mind telling us, in your own words, what happened after you
bought Japanese stocks in January of 1989?"
"Not at all It is very simple. The Nikkei index was over 39,000 when I
bought. Shortly thereafter it crashed. I didn't worry about it because I was
investing for the long term. And over the long term I believed Japan would
do well. It was, well, inevitable.
I had read the papers. I also read a few of those books about how smart the
Japanese were and how their management techniques were so superior to those
in America. So, it seemed to me that betting on Japan was a no-brainer. But
that was in '89. Then, when the Nikkei got down to 8,000, I began to have
second thoughts. And then, when it didn't bounce back I had third
thoughts...and fourth thoughts. Japanese stocks stayed down for the next 15
years. They're only starting to come back now. The Nikkei is now back to
almost 20,000. It's in all the papers that Japanese stocks are at a 15-year
high. But wait a minute, I'm still out half my money. Let's face it. I may
be dead before I get my money back."
"Thank you...no more questions."
Look up, dear reader. The 'Crash Alert' flag still flies. Oh, long may it
waver...
Now, more news:
-----------------
Robin Mackrill surveying the damage:
*** Well hello volatility, where have you been all
this time?
- We've been becalmed here so long in the doldrums of a docile stock market
that we have quite forgotten the stomach churning, buttock clenching, green
palour- inducing sensations that come with being caught on the wrong side of
a financial market storm.
- Pick a stock market, any market in our globalised, homogenised,
sterilised, aneasthetised, dumbed down, interconnected ever shrinking
globe... and it tanked.
But the original epicentre was somewhere new...that emerging sleeping giant
that even Napoleon worried fleetingly about...China. Shanghai's A share
index – ie for Chinese investors only - slumped 9%.
- But if that was the smack in the mouth for Mr Global Market, weaker than
expected US data on durable goods orders followed up with a knee in the
groin. The Dow Jones gasped at the assault and shed 416 points, US
treasuries gasped some more and gave up 16 basis points to yield 4.47%.
- Indeed gasping a wheezing could be heard around the world's bourses as
their fattened husks had the stuffing knocked out of them.
London's FTSE 100 shed 148 points to close 2.3% down.
In Europe, the CAC lost a little over 3% and in Germany the DAX gave up a
little under 3%. The Hang Seng lost 360 points closing 1.7% down on the day
at 20,147 and the Nikkei gave up 95 points, down 0.5%.
- A note from Deutsche bank this morning points to a number of contributing
factors that prompted le grand fortune cookie Chinois to explode and shower
the rest of us with crumbs.
The next inflation number is likely to be bad and lead to a rise in interest
rates. The government is threatening a crackdown on stock market corruption
and is looking to bring forward the introduction of capital gains tax on
share dealing. Last but not least, it turns out we're not the only one
talking a load of bubbles. Zhou Xiaochuan, the governor of the The People's
Bank of China actively encouraged discussion as to whether there was a
bubble in the A share market.
- Emerging markets guru Dr Mark Mobius interviewed on Bloomberg, predicts
Chinese stocks will fall further.
No surprise to anyone listening to BBC radio 5 this morning. They report
that some Chinese were even trading their homes with pawnbrokers to raise
cash to stuff into the stock market. Next we'll be hearing about a rise in
homeless Chinese gamblers and Shanghai pawnbrokers entering the real estate
business.
- The gazillion dollar question on every market watcher's lips. Correction
or crash? Well after the broad based sell off yesterday it looks as though
markets are regaining some poise. European markets are off their lows and
the US market has opened higher.
Bob Parker of Credit Suisse reckons the sell off could last 2-3 weeks. Our
market watching crystal balls are more cloudy here at the Daily Reckoning,
so we merely sit on the sidelines huddled around our Crash Alert flag and
wonder what Confucius would have made of all this.
Could it be the Year of the Pig will turn out to be a pig of a year?
PS – Don't forget! You can now receive a FREE report simply for doing our
short survey on the Daily Reckoning.
We'd really like to know your thoughts on the service, and there are just 11
quick and easy questions to answer.
Straight afterwards you can download your free report "Proven Strategies of
the World's Greatest Investors,"
which reveals the secrets that have made these five investors, arguably, the
best of all time. Just click this link to start the survey:
http://www.questform.co.uk/user/takesurvey.php?cid=797&fid=757
-----------------------------
And more views:
*** Oh...and what's this? Alan Greenspan – remember him? – says the U.S.
economy might go into recession before the end of 2007.
He may be right. The sub-prime mortgage market is getting whacked hard. And
when people can't buy at the bottom, it weakens the whole market structure.
Prices fall. Jobs are lost. Spending declines. What we're seeing so far is
that people who can afford to do so are taking their houses off the market.
This creates an invisible inventory of empty houses that will probably hold
down prices for many months to come. Steadily, but surely, the millwheel of
a correction will grind away.
*** A friend of ours from our old neighborhood in Baltimore is visiting us
at the beach. She brings a strange and sad story:
"Do you remember that black kid who used to work for you? His name was
Shawn, but they called him Pookie. He was a good kid in a bad situation. Our
neighbours Kathie and George liked him so much they practically adopted him.
He had a very good attitude. He liked to work...and learn. I remember you
had him helping you scrape wallpaper off the walls. That seems like so long
ago. Well, it was a long time ago – 25 years. But we were all pioneers in
that neighbourhood, weren't we?
Because the houses were so big and beautiful. But you remember, what the
neighbourhood was like. Drug dealers. Prostitutes. Layabouts. Bums. It was
just a typical inner-city slum. Maybe worse than most because people were
always shooting at one another. And most of the people were incorrigible.
"But Pookie was nice. We all tried to help him. His father was in prison,
remember? He had a brother, I can't remember his name. And I don't know
about the rest of the family, but I think he had a very hard time of it. So,
we liked him and tried to help him. I think Kathie and George even helped
him with his homework and that sort of thing.
"And then, when he grew up, you probably don't even remember this, but you
gave him a job in the business.
It was a great opportunity for him. Well, you know how
your business is. Nobody really cares where you went
to school or what your background is. So, we were
all hoping that this would be a good career path
for Pookie.
"But then he was fired. We heard he had stolen credit card numbers or
something. He wasn't prosecuted.
Nothing was ever proven, but naturally you couldn't have someone around the
credit card numbers you weren't 100% sure of...so he had to go. I remember,
Kathie and George were heartbroken. They treated him like their own son.
"And then one thing kind of led to another. Time went by. He never did seem
to find any work that he liked.
And then we heard that he had a lot of lifestyle issues...or problems. And
then he both he and his brother were in various treatment programs. They
were suicidal, we heard.
"And then, last week...Pookie hanged himself. The next day, his brother –
who was already in a mental hospital, I believe – hanged himself too."
*** In that mordant vein, we read that Vice President Dick Cheney was almost
blown up on Monday. He said attackers were trying "to find ways to question
the authority of the central government."
Predictably, our Veep is wrong. If the assassins had wanted to question the
authority of the central government they could have sent a letter to the
newspaper. What they were trying to do was to kill him.
But they were as incompetent as he is; instead of offing him, they only
managed to kill 23 other people who didn't deserve to die.
The Daily Reckoning PRESENTS:
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