There are two huge trends in global investing at the moment; one is the move towards evidence-based decision making, and the other is the growing popularity of ESG investing. I’m an advocate of both. How, then, can investors like myself combine the two to maximum effect?
There’s a healthy debate taking place just now about asset management and corporate governance. In the US, for instance, a campaign has been launched to boycott two big passive fund providers, Vanguard and BlackRock, over their refusal to dispose of their holdings in gun manufacturers.
Although I generally encourage shareholder activism and support tighter gun controls myself, I don’t think that’s the best approach. When you sell a stock, you lose any ability you had to encourage, or compel, that company to change its ways. I would argue that passive managers, which have no choice but to invest in companies for the long term, are far better placed to hold boards to account than active fund managers, which typically buy and sell stocks far more frequently than they should.
My personal preference, then, for those who want to invest in a way that is both evidence-based and socially and environmentally responsible, is to choose a low-cost passive provider with an effective corporate governance committee.
The question then, of course, is whether you think a particular passive provider is proactive enough on the ESG issue, or issues, you care about. A big fan though I am of Vanguard, it’s by no means perfect, and I would certainly say it has room for improvement on governance. But, generally speaking, firms like Vanguard, BlackRock and Dimensional have really upped their game on governance in recent years. Here in the UK, it’s a largely passive provider, LGIM, which is setting the standard on issues such as excessive boardroom pay.
But what if you don’t think any of the big passive providers are doing enough to tackle the issues you feel so strongly about? Well, you could, if you wanted, go for a passive fund that filters out so-called “sin” stocks; but again, that simply hands corporate oversight to investors who may not be as principled as you.
Another option (and one you may not have expected me to suggest) is an actively managed fund with a positive screen. In other words, instead of a fund that weeds out the bad guys, choose one that specifically invests in the good guys. OK, your returns may fall short of what you could achieve with a low-cost fund, but, by definition, ESG investors should be willing, if necessary, to sacrifice an element of their financial returns in order to achieve the impact they’re looking for. Remember, too, that you’re more likely to achieve better returns if you pick a fund with a relatively low fee and which keeps trading to a minimum.
This is not an endorsement, and certainly not a recommendation, but just such a fund is Women Impact Strategy run by ThirtyNorth Investments, based in Louisiana. It’s a portfolio of 50 stocks, and to qualify for inclusion, a company needs to have at least 20% women on the board of directors and at least one woman in the C-suite. It also ranks stocks on three factors — size, value and profitability.
I’ve interviewed Blair DuQuesnay, one of the portfolio’s managers, for our sister blog Adviser 2.0, and it’s a fascinating read: