Category Archives: mutual fund

Reasons to Invest Responsibly

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Why would you want to have a portfolio that invests Responsibly?  A typical portfolio could very likely own investments in corporations involved in these or other similar negative impacts:

Mount Polley Mine Tailings Disaster

Outrageous Executive Pay

Countries that Manufacture Landmines and Cluster Munitions

Dangerous and Exploitive Working Conditions

And this list unfortunately could go on for pages.  However Responsible Investments seek to improve the world in many ways.   For Public Stock Companies this can take the form of Shareholder Engagement.  In the case of Mutual Fund Companies they will bring resolutions to the Annual Meetings and will engage the senior company management in ongoing discussions to improve the corporate response to Environmental, Social and Governance challenges.   Here are a few examples of how this works in Responsible Investment Funds:

Goldcorp Discussions – Human Rights in Guatemala and Chile

Say on Pay – Oceanrock Meritas Family of Investments

Negative Screening of Companies involved in Weapons Contracting (inactive link)

Loblaws Engagement in Bangladesh “Joe Fresh” brand (inactive link)

These engagements with Companies are works in progress.  There is generally an emphasis to work toward “best in class” investments.  This recognizes companies that are improving their efforts to be good corporate citizens are better candidates for investment.  If you want your investments to begin to help build a better world, consider investing in Responsible Investments.  As a member of the Responsible Investment Association of Canada I encourage investors to educate themselves on this important subject.  A visit to the RIA Canada website is a good place to start.

“Responsible Investment” Funds – How to choose?

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What is a Responsible Investment Fund? Other names for funds of this type might be called Socially Responsible, Sustainable, Green, and other descriptive names. All of them have in common that they use a predefined set of criteria to determine what companies they can and cannot invest in. It is these criteria that shape the important differences between these funds.

In Canada there are quite a few companies that offer Responsible Investment Funds. IA Clarington Inhance Funds, NEI Ethical Funds, Oceanrock Meritas Funds, RBC Jantzi and PH&N funds are some of the better known Funds of this type. Other Companies such as AGF and Investors Group also offer some options in the Responsible Investment area. Though the funds may look similar, if you drill deep enough into their composition and practices you will find important differences.

For example all the funds use ESG (environment, social, governance) performance indicators to determine how well various companies compare in their practices in these areas. Some companies have staff dedicated to this research. Most other companies use third party research services to source their ESG performance data. So is it important for you to know if the company is doing their own research?

Do the funds management have a Corporate Engagement Program? Ethical, Inhance and Meritas Funds all actively engage the companies in their portfolios to influence beneficial changes to corporate policies or practices that reflect negatively on their accomplishment of the ESG criteria. The by now well known “Say on Pay” shareholder resolutions were spearheaded by Responsible Investment Funds with Meritas Funds, president Gary Hawton playing a lead role in this.

So what filters do the Mutual Funds use to align their portfolios with your values? This is where it can become complicated and confusing for the average investor. What type of companies are filtered out of a portfolio? Gambling, Nuclear Power, Weapons Manufacturing are not allowed in most of these portfolios. However gambling activities are allowed in at least one Fund. Many investors are looking for portfolios that minimize fossil fuels based companies. In Canada it is difficult to have a representative portfolio without including some fossil fuel based companies. Mining is also a sector that is challenged by sustainability. In these cases the managers will often use “Best of Sector” in an attempt to create a positive dialogue with companies in these sectors so they will improve their processes or products thus having a more positive impact on the overall environment.

Investors are increasingly concerned about Climate Change and how it will impact their portfolios and more importantly their lives. The Responsible Investment Association of Canada supports the Canadian Investor Statement on Climate Change Policy. Your investment choices will influence the amount of fossil fuels in a portfolio. For example a Global Equity fund would generally have lower % of fossil fuel based corporations in the portfolio compared to a Canadian Equity fund. There are also specialized funds such as the AGF Clean Environment Fund that do not have explicit ESG mandates, however they are often associated with the category of Responsible Investment funds.

Another important item for some investors is a commitment to address poverty and local enterprise. Meritas Funds reserves up to 2% of their portfolio assets to be invested in Community Development Investments (such as Micro Credit) programs. This is not a charitable investment as the loans are expected to be paid back and usually with a fair interest rate. These funds provide much needed capital for projects that normally do not receive much attention from corporations and government. The vast majority of loans are repaid and so this type of investment has proven to be very satisfying for all parties involved.

In depth knowledge is required to match portfolios to needs. The Sustainalytics Jantzi Canadian Index is available for purchase through Meritas or through the RBC Asset Management. The portfolios appear very similar, however Meritas screens out for gambling whereas the RBC index does not. Meritas uses Community Development Investments whereas RBC Asset Management does not. As well, some of these investment funds are also available through Insurance Company Segregated Funds product. Segregated Funds are similar to their mutual fund peers except that they have guarantees associated with them and they can be effective for Estate planning.

In summary if you wish to purchase a Responsible Investment Fund to reflect your personal values you do need to look more deeply into the specific portfolios of the many individual mutual funds in this category. The Corporate Knights magazine 2012 Responsible Investing Guide ranks the various funds. You can build a portfolio yourself, however you may wish to receive expert advice on all of the options available to you. Contact me if you have any questions on this subject or any other interest in “Responsible Investing”.

Are all “Responsible” Mutual Funds the same?

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What is the difference between a “regular” mutual fund and a “responsible” mutual fund.  For the average investor it may not be apparent; what makes one mutual fund different from another? All mutual funds including those described as Sustainable, Socially Responsible, Ethical or even Green share many characteristics.

I will use the word “responsible” when speaking generally about these type of funds.  The investments usually consist of stocks or bonds or a combination of both.  The word “mutual” is important.  The individual investor shares the same objectives as other investors in the same fund.  These shared objectives are represented collectively by the investments in the fund.  All of the investors of any specific fund own shares or units of the same fund.  This mutual sharing allows the investor to benefit from the affordability of expertise and portfolios that would typically be beyond their own ability and means.

There are many types of management styles offered by mutual funds.  There are actively managed funds, passively managed funds, exchange traded funds, portfolio funds amongst many types.  This discussion will focus primarily on Actively Managed Funds.  The majority of the responsible funds are actively managed.  Even the responsible funds based on an Index require a level of management beyond the typical index fund.  This is due to the fact that these funds use filters to determine what securities to either include or to exclude from their investment portfolios.

Many mutual funds are equity based.  This means they invest primarily in stocks of publicly traded companies.  Many will invest in large cap stocks, mid cap stocks or small cap stocks.  A few managers will invest in any of these categories within the same fund. There are also fixed income funds (bonds) or a combination of both stocks and bonds in the same fund which would typically be called a balanced fund.  Responsible funds are no different in this way.  Where they are different, however is important to understand if you are considering investing in these funds.

Responsible Investment Funds will use screening to determine which securities are eligible for inclusion in the portfolio based on factors that are not an integral part of a regular mutual fund portfolio.

The companies with the better performance in environmental protection, climate change, alternative energy, human rights, employee relations, aboriginal relations, executive compensation are determined by positive/best-of-sector screening.  Funds will also use exclusionary screening to eliminate shares of companies involved in controversial activities (e.g. weapons manufacturing or tobacco), the screening out of entire sectors, or the screening out of poor-performing companies.

These screens are not the same from one mutual fund company to the next.  For example, the existing responsible funds in Canada do not invest in companies that produce nuclear power due primarily to the problems with radioactive pollution and waste management.  However some funds such as the U.S. Calvert Investments will invest in these companies depending on certain conditions.  So your personal values and your country of residence can impact your investment choices.

How can you sort out which company screens most closely reflect your personal values when you invest?  Part II of this blog will help to clarify some of this for you.  We will look more deeply into the individual fund company screens and how this determines the inclusion or exclusion of specific companies.  This is written for Canadian investors, though others are welcome to share this information.  (*Each country has its own securities regulations and investment environment and investors should seek knowledgeable and qualified advice before purchasing any securities).