Ethical Investing is hardly a new phenomenon; individuals and organisations have been considering ethical criteria as part of the process of capital allocation for many years. Indeed, the history of ethical investing dates back to at least 1758 when the Quakers ruled out investing in the slave trade. For many years, ethical investing was the domain of the religious. Everyone will have their own reasons for becoming an ethical investor: here are mine.
The trail-blazer of socially responsible investment in Australia was August Investments, a small fund started in 1981 and still in operation today. They were one of the founders of the well-known (and larger) fund managers, Australian Ethical Investment. Today, it seems like just about every major fund manager offers an “Ethical” option, although investors would do well to investigate what ethics, exactly, are guiding their managers.
There are three main types of ethical investing:
1) Positive contribution - favouring a company because its activities make society better
2) Negative screen - excluding a company because its activities hurt society
3) Comparative superiority - favouring a company over a similar company, because, in comparison, it is better for or less harmful to society.
This website has two purposes. One is to encourage people to invest in accordance with their own ethics, and the other is to encourage financial advisers and fund managers to do their jobs with integrity to their clients. The current fee structure of the majority of financial advisers and fund managers is fundamentally flawed. For example, many financial advisors receive ongoing commissions for putting their clients’ money into certain funds, regardless of the performance of the funds. Big funds like to advertise low fees because as a fund grows in size, the fees usually reduce as a percentage of funds managed. But what they don’t mention on their promotional material is that size comes with obvious disadvantages. To quote Warren Buffett; “I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money…”
If that’s not enough, Buffett’s views (which I happily adopt) on remuneration for funds managers are anathema to much of the funds management industry, especially those with the privilege of managing other people's superannuation. In my view, funds managers who value integrity , should at the very least model their fee structure on Berkshire’s fee structure, namely; 0% management fees, 25% incentive fee above a 6% hurdle, and any deficiencies in earnings below the 6% carried forward.
But that’s enough pontificating. The Hypothetical Ethical Share Portfolio is my experiment in ethical investing; don't hesitate to create your own. I'm Claude Walker, this is my blog, and I encourage you to receive the newsletter or email me at claude *at* ethicalequities.com.au if you have anything to add.
Disclosure: Taking Some Off The Table
March 04, 2019
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