Do SRI strategies produce results?
By Lisa Cohen
An old saw among investment portfolio managers is that “sin” stocks – tobacco, firearms, defense manufacturers and so forth – outperform stocks of companies focused on doing the right thing. Skeptics of responsible investing also point out that social agendas and values constrain investment managers from picking simply the best investments. This shortsighted axiom largely misses a key point illustrated by the financial crisis. Corporate misbehavior and excessive risk taking at formerly well-regarded organizations has created disastrous financial results, and been punished quite severely by the securities markets. At the same time, prudent and careful organizations have weathered the storm in better shape.
Now, in addition to these rather obvious opportunities for improvement of corporate behavior and financial results, we also have validation of investment outperformance for responsible investment funds in a recent study by the Social Investment Forum (SIF), an organization for responsible investing industry professionals.
SIF recently published the results of a year-end 2009 analysis showing that 65% of the all of the funds they classify as socially responsible actually outperformed their benchmarks in calendar 2009, across all asset classes and market caps, after expenses. Investment wonks will want to know about the long term performance stats, and rightfully so. Over the past ten years, arguably among the most difficult of investing periods, 37.5% of the responsible funds outperformed their respective benchmarks. Most significantly, the largest percentage of funds (65.5%) outperforming their indices on a ten year basis are in US Large Cap category, competing against the notoriously hard-to-beat S&P 500 index. Bond funds did not fare nearly as well, and none of the funds evaluated beat the (also very efficient) Barclays Capital US Aggregate index. Check out the interactive tool at http://www.socialinvest.org/resources/mfpc/.
Contrarians will point out that every analysis – this included - has its limitations. The data does not take loads into consideration. And it looks at just 22 fund families, which in this case, represents a healthy cross section of available data. However. In our view, that any analysis could prove straight-up index-beating performance for responsible investing funds is worthy of celebration and a bit of “I told you so.”
As the responsible investing movement has grown, many investment professionals have begun to yield ground on their old-school position. There is increasing agreement that factors including a company’s impact on the environment, its social agenda, and its governance practices (all together referred to as ESG) have a direct impact on the bottom line and the performance of a company’s securities over time. Bloomberg terminals, a key information source for most portfolio managers, now offer a package of ESG data on companies they cover, making environmental impact info is as accessible as stock price-to-earnings ratios.
To get here, champions of the cause have waged a battle for credibility, supported by investors’ commitment to values and causes. While quite bracing to be on the offence all the time, it is quite nice to rest for a bit and point in the direction of some performance data as support for our position.
About Lisa Cohen
Lisa Cohen is the CEO and Principal of Momentum Partners, an advisory firm to financial services and investment management industry leaders committed to driving growth and innovation. Lisa works with clients to address evolving distribution channels, innovate new products and services, identify partners and collaborators, build strategies and business plans, and more. She is a motivational leader who inspires and supports contrarian thinking, a frequent industry speaker and moderator, and regular media contributor. Momentum Partners is a signatory to the United Nations Principles for Responsible Investment and a member of the RepThinkTank, a consortium of specialized investment industry providers brought to market by the RegisteredRep team. Lisa writes the FundHouse column for RegisteredRep Magazine. Lisa’s background includes leadership positions in both corporate financial services (Managing Director and SVP, Evergreen Investments and Director, John Hancock) and advisory/consulting services. Lisa is a graduate of Smith College and has completed Harvard’s Executive Education program in Investment Decisions and Behavioral Finance.
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