A column in this week’s Financial Times Lex section caught my eye, just before the tone of the article got stuck in my throat. Its patronising opening line: “Pity the socially responsible investor” caused the windpipe blockage. Strangely, it made me think of the Bob Dylan song: “I pity the poor immigrant who wishes he would’ve stayed home, who uses all his power to do evil but in the end is always left so alone,” – albeit in reverse. Those ‘worthy’ socially responsible investors, said Lex, were trying to do good, but being left behind in the profit stakes. It also made me realise there is a significant job to do on public relations for responsible investment, but I’ll come back to that. Lex’s point, using data from Lipper, was that for the four years leading to the peak in US equities last year (2003-2007), the median US SRI equity fund underperformed mainstream ‘unconstrained’ US mutual fund counterparts by about 2%. This, it said, was because SRI investors had shunned ‘nasty major energy companies’, denting returns as oil hit $150 per barrel. It said that even as oil prices retreated, SRI managers were suffering compared to ‘their less worthy cousins’, citing Merrill Lynch analysis, which it said showed that, during the six recessions since 1970, alcohol, tobacco and casino stocks had, on average,returned 11% against a 1.5% loss for the S&P 500. I took a look at the Lipper figures. As expected, they do show that the ‘median’ SRI fund underperformed the median mainstream US equity fund by just over 2% between the end of 2003 and the middle of 2007. However, the ‘average’ fund performance for the sector is closer with total returns of 10.4% for SRI funds against 11.7% for mainstream and an S&P500 daily reinvested average of just below 11%. One point here, I think, is that many investors selecting SRI retail funds, notably in the US, expect that their ‘values-based’ investing might not be the best performer, but a solid performer nonetheless. I’ve yet to see a study yet that suggested screening out ‘sin’ stocks was likely to lead to outperformance, nor a claim to do so. We all know that drinking and smoking rise in a recession, especially one driven by irresponsible investment! However, it is instructive to look at the performance figures for the last year (31/12/07 to 14/11/08), which tell a different story to Lex. Taking the FT’s median fund reference point (50th percentile), SRI funds (-40.7%) actually outperformed their mainstream counterparts (-41.8%) against an S&P daily re-invested benchmark of 39.3%. Neither set of results could be deemed impressive, but relative performance is what
we are talking about here. Interestingly, the average SRI fund return was also up by about 0.5% over the same period. Significantly, that outperformance has held up, albeit at a slight reduction, during the last three turbulent months of 2008. Pity the mainstream investors in the last year, perhaps? I make the somewhat flippant point because I think there is a tendency in broader markets and the press to accentuate the ‘worthiness’ and deride the seriousness of ‘responsibility’ as an investment discipline. There is a pigeon-hole called SRI fund performance that is used to bracket everything the sector does; often with little nuance or differentiation between values-based screening, positive screening or ESG integration. By making a stance on wanting to see markets evolve sustainably, the SRI community is regularly ripe for a kicking, it seems. Yet talking to major pension funds such as France’s FRR or the UK Environment Agency Pension Fund who have allocated significant RI-based mandates, they are pleased with the relative performance of specialist RI managers, notably on a risk-adjusted basis over the last few years, and particularly in the current climate. The various strategies employed in responsible investment mandates and products are often at thecutting edge of investment analysis, stock selection and governance techniques, while at the same time pushing for gradual and nuanced improvements in corporate and market behaviour. Those arguments are too rarely heard. Responsible investors have much to be proud of, despite the complex moral hoops they are often forced to jump through compared with other investment strategies. They have led the agenda in pushing environmental considerations such as carbon emissions disclosures into stock selection. They have also been at the vanguard of the gradual mainstreaming of extra-financial issues (including social and governance factors) into analysis, to the extent that few serious investment banks are without a specialist sustainability team. Responsible investing is no returns panacea, and it is dangerous to claim it as such. But it is a serious discipline for shaping future performance based on material, often overlooked investment concerns and long-term values – many of which are both morally and economically sensible. The public relations job still to be done, I believe, is to stand up and make those points boldly, shake off the ethical ‘kick-me’ badge that’s been stuck on our back, and prove our worth, as well as our worthiness.