Ethical fund interest rises in wake of scandals
Screening for corporate governance practices is one of the many attractions for a growing number of investors
By JEFF BUCKSTEIN
Special to The Globe and Mail
Wednesday February 5, 2003
Unlike many other RRSP contributors this season, Katie FitzRandolph plans to sink her entire annual investment into mutual funds - unfazed by the bear market that has decimated the value of many fund holdings over the past three years. The communications officer with the Ontario Public Service Employees' Union in Toronto also knows she will commit her money to only one type of fund. In her case, that is the Investors Summa Fund, run by Investors Group Inc. of Winnipeg, which is known for its devotion to ethical causes.
"I'm living in a fairly affluent country making a decent living and I didn't want to retire on the backs of child labour in Third World countries," Ms. FitzRandolph says.
"Nor did I want to gain my pension through a company exploiting its staff, mistreating people, polluting and so on," adds Ms. FitzRandolph, who has been putting her money into socially responsible investment (SRI) funds for the past 20 years.
One of the many reasons Ms. FitzRandolph has always been attracted to socially responsible, or ethical, funds is that among the many screens they apply to companies are ones relating to corporate governance issues.
And after companies like Enron Corp. and WorldCom Inc. made headlines in the last year or so over practices linked to corporate governance, this issue has - along with traditional concerns including the environment, human rights and employee relations - resonated with more concerned investors.
"Over the past five years, I've noticed a significant increase in the number of investors who are putting SRI-related investments into their RRSP," says Cheryl Mont, a Toronto-based certified general accountant.
"Add in the corporate governance issues that new potential investors have expressed concern about to me and I think this could have quite a significant impact on RRSP sales this year," she says.
Tim Johnson, a financial planner with Cartier Partners in Waterloo, Ont., estimates that about 5 per cent of his clients have, over the past year, expressed concern about the corporate practice screens that are being applied to their SRI-related investments, half of which are located in registered retirement savings plans.
A handful of new clients have also cited how "the whole SRI issue has become much more interesting and attractive to them," he adds.
Fund companies have also paid attention to the scandals and surrounding issues.
Ethical Funds Inc. launched seven new funds last fall, bringing the total to 19, and events south of the border were "certainly one of the factors that motivated us to expand our product line," says president and chief operating officer Margaret Yee.
Still, the country's biggest ethical fund managers insist that screening companies for good corporate governance practices is nothing new.
"It has always been part of our investment philosophy to spend time analyzing companies based on their corporate governance practices [even though] that's only become more in vogue during the last year or so," says Scott Morrison, manager of the $2-billion Investors Summa Fund.
"We've always applied those screens," echoes Ms. Yee.
Moreover, the company's fundholders have never been shy about "exercising our proxies to let companies know what is and isn't socially acceptable," she says.
While Acuity Investment Management Inc. has traditionally applied a "rigorous screening process" of the corporate governance practices of the companies in its funds, "those screens have been beefed up a little bit based on some of the issues that have arisen over the past couple of years," says Martin Grosskopf, an investment analyst with the company.
SRI funds have certainly attracted their share of investors. By the middle of last year, socially screened funds in Canada held $9.85-billion in assets, including $4.32-billion in mutual funds and $5.53-billion in labour-sponsored venture capital funds.
That represents about 2.4 per cent of the total retail fund market, says Eugene Ellmen, director of the Toronto-based Social Investment Organization.
RRSPs are one important vehicle for ethical fund holdings. At Acuity Investment Management in Toronto, about 80 per cent of client proceeds in its six ethical funds are held in individual RRSPs, says Mr. Grosskopf.
And 20.7 per cent of assets of Meritas Mutual Funds' five ethical funds were in RRSPs at the end of last year. That figure is up from the 14.1 per cent held in such plans at the end of 2001, says Brian Barsness, vice-president of relationship management.
While socially conscious investors may look for more than financial returns, they hold their own in that regard.
In the three years ended Dec. 31, 2002, the total return for the benchmark Jantzi Social Index, a grouping of 60 market-cap-weighted stocks chosen for their ethical practices, decreased in value by 17.4 per cent.
That was in line with the 17.8-per-cent decline of the S&P/TSX composite index and better than the 20.9-per-cent loss of the S&P/TSX 60.
But one thing that bodes well for these funds is that ethical investors often tend to be a little more determined than those investing for purely financial reasons to buy and hold, even in the face of market adversity, say analysts.
As a result, the funds have not seen the same level of redemptions as other players.
For instance, Meritas' redemptions in 2002 were only 4.3 per cent of average assets, far below the Canadian investment industry's average redemption rate of 27.6 per cent, according to the Investment Funds Institute of Canada.
"If you talk to investment advisers across the country ... [they] will tell you anecdotally the SRI clientele they have might be a little bit more demanding with respect to asking questions and being more educated about the market," says Michael Jantzi, president of Michael Jantzi Research Associates Inc.
"But they're not the ones panicking or selling when the market goes down a little bit. They tend to be more loyal clients," he says.
So investors like Ms. FitzRandolph insist they will stick with their convictions - and their holdings.
"I've hung in there, rightly or wrongly," she says.