Does investing in socially responsible funds cost more and is it justified?
moneyrelations :: Oct.30.2007
Hello, stranger! New here? How about subscribing to my RSS feed? Thanks for visiting!
As I mentioned many times, this blog has opened my eyes to a lot of things. It has motivated me to learn more about investing, introduced me to new technologies, and it has made me into a kinder, gentler, more socially aware person.
I think.
Okay, let’s cut to the chase: when you go shopping, do you go out of your way to buy ecologically friendly products? I really have to say I never thought about it. If two products were priced equally in front of me and one said dolphin friendly, of course I’d choose that one over another product. But would I specifically seek a more expensive product out? I think not. To focus this towards investing, would you pay more to invest in a mutual fund that was socially responsible - and is it really?
I came across an article from the Vancouver Sun which asks, Just how responsible is your ’socially responsible’ fund? In the article, it explains that despite the marketing hype, there’s little difference between the ethical funds and the plain vanilla variety. The depth of the Canadian market leaves really slim pickings for these ethical funds to separate the not so bad polluters from the truly ugly. Due to the driving force of the Canadian economy: mining, energy and financials, it’s a given that a mutual fund would hold companies like HudBay Minerals, Suncor, and Encana - not exactly the model companies for the environmental movement. So how do these socially responsible mutual funds justify investing in these companies? I would describe it as the mole approach. They invest in these companies in the hopes of changing company behavior.
Is that like marrying someone and hoping you can change them later? Has that ever worked?
I decided to look into an ethical mutual fund company for kicks. Who knows, I could learn something. The article mentioned Ethical Mutual Fund Company. Great, they fit my criteria!
The first thing I looked at was the management expense ratio (MER) of these funds. Somehow, I’m thinking social responsibility costs more. This is what I found on their mutual fund basics page regarding MER:
The Management Expense Ratio (MER) is the percentage that the management fee and operating expenses represent of the fund’s average net assets. For example, if a $100 million fund has $2 million in costs for the year its MER will be 2%. MERs can range from under 1% per year for some money market funds to almost 3% for some equity funds. The higher the MER, the greater the impact on the fund’s performance and the return to its investors.
Are they serious in that last sentence? Since when does a high MER have greater impact on fund performance and return? Yeah, by eating up profits maybe. That pretty much stopped my research right there as I’m thinking I’m better off with my index funds. These ethical funds invest in the same companies but they charge more for it. How about being socially responsible by not robbing people blind.
Investing ::
4 Comments »
Did you enjoy the post?
Subscribe to Money Relations and the Comments as well.
Share in Social Media
Related Posts:
I might be naive but what I hope they’re arguing is that there’s a NEGATIVE correlation between MERs and fund performance - ie. more gets lopped off before being passed along to the client, which indeed ‘impacts’ the return to the investors.
I think there may be a genuine case to be made for SRI funds having higher mer’s — they don’t have the economies of scale, for one thing, ie., tend to be new, boutique firms.
And again, perhaps naively, I do hope that by representing a sizeable minority of shareholders, they do indeed lobby effectively for changes in practice.
All that being said … I still do all my own investing, and have the piece of mind that comes from having made up my own mind about any given company.
Regarding shopping - for me, my choices have been creeping towards more sustained ones. I get organic, mostly local groceries delivered to me now, from an awesome company called SPUD in Vancouver. And I usually buy free-range eggs and chickens (ugh. I saw a truck load of chickens crammed … and have been turned off ever since — but can live with free range chickens). So, yeah, I’m starting to pay more in exchange for the ‘feel good’ factor. But that’s me living on the left-coast
Interesting… I read the last sentence of the MER quote again to see if I got the meaning right… it’s deliciously vague
I think it could be a warning against high MERs or a justification of high MERs.
But I’m afraid I’m going to have to pass on these SR funds as I too want to invest for myself. It’s for me to decide what I want to do with my money and how I want to give to charity should I make a profit and collect a tax receipt. I don’t want to give these away in fees with no guarantee of returns.
And finally, out of a moment of weakness, I did buy some overpriced fair trade tea leaves from a coffee shop. I should ask them how much is going to the farmers and how much they are skimming.
[...] Does investing in socially responsible funds cost more and is it justified? (at Money Relations.) [...]
[...] Does investing in socially responsible funds cost more and is it justified? @ Money Relations [...]