We have been supporters of the concept of socially responsible investing and have always had some of our investment portfolio in funds that incorporate social screens. Our experience has not been particularly inspiring. I think over the next few years we're going to get our money out of the socially responsible funds where we currently have it, and we'll have to explore other options. Fundamentally, I think socially responsible investing can work. It has a cost, but as long as you know what that is you can make your own decisions about whether that cost is worth it to you. You also have to go into socially responsible investing with the same ideas in mind that you would be thinking about with any other investing.
We started out with some money invested in the Dreyfus Third Century Fund. The Dreyfus Third Century Fund started in 1972 and is one of the oldest and largest socially responsible funds in the US. We eventually moved our money out of Dreyfus, because the returns seemed somewhat lackluster.
We moved our socially responsible investing over to a company called Citizens Funds, which offered a range of socially responsible funds, including stock funds, bond funds, and money market funds. Some of their funds were structured to follow a socially responsible index, which seemed to offer the promise of lower expenses and therefore more net returns into the shareholder's pocket. They also seemed to be emphasizing industries that had less environmental impact (high tech instead of oil, for example), and for a while that strategy looked brilliant. Then came the technology crash in the early 2000s and their funds haven't looked so good since then.
It might be useful to compare three funds we've owned that are similar in terms of what they invest in: stocks of large U.S. companies. We've owned three such funds throughout a 14-year period beginning at the start of 2000: Vanguard Growth Index Fund, Vanguard Windsor II Fund, and Citizens Index Fund (which later merged into the Sentinel Sustainable Core Opportunities Fund). If we had put $1000 into each of those funds on January 1, 2000, by the end of 2013 we would have this much in each of them:
Making $45 over a 14-year period is certainly pretty lame. That's an average of 0.3% per year. The Growth Index Fund averaged over 2.5% per year and the Windsor II Fund averaged over 7% per year. Part of this is probably due to costs. Vanguard is known to be a very frugal organization in terms of management expense ratios. The Growth Index fund charges investors 0.24% in management expenses each year, and the Windsor II fund is a bit higher at 0.36%. As of 2015, Sentinel's fund was charging 1.26% in management expenses each year. All things being equal, you would expect Sentinel to pay out about 1% less to the investor each year after expenses, compared to these other funds. Based on the figures above, though, it's actually paying out over 2% less than the Growth Index Fund, and way less than Windsor II. This is pretty disappointing.
The Sentinel company has since merged with a company called Touchstone. Touchstone will continue to offer most of the same funds as socially responsible funds, but some of them have been merged with other Touchstone funds to make larger mutual funds. I'm not sure of the full story behind this. It's not that uncommon for mutual funds to disappear by merger if they haven't done all that well. It's a way of making a track record that's very hard to market kind of go away. Or it may be that the fact that I've seen a mutual fund company merge twice in the time I've owned shares just means I'm getting old.
No, I don't think so. In principle, we should be able to invest in socially responsible funds without taking a huge hit on investment returns. We need to apply the same kinds of approaches I've been talking about in other blurbs in this series:
Some of the organizations that publish indexes have created socially responsible indexes. For example, there is one called the MSCI KLD 400 Social Index that applies social screens to the largest companies in the US to create an index of 400 large companies. The companies they include have high Environmental, Social, and Governance (ESG) ratings. The non-social index this would compare most closely with is the S&P 500 Index of the 500 largest US companies. Over the five-year period between 2009 and 2013, the MSCI KLD 400 index averaged total returns of 14.6% per year. In the same period, the S&P 500 index averaged total returns of 15.6% per year. If you take a longer period, starting in April 1990 (roughly when the KLD 400 index started) and going all the way to 2011, the MSCI KLD 400 index actually outperformed the S&P 500 index, returning about 9.7% per year compared to 9%. Of course, these are returns for the indexes and not funds based on them, so there are no fund expenses involved. Nonetheless, from this example it looks like you can't really draw conclusions about which index will outperform the other - it seems to depend on which period you choose to look at.
If you're interested in Canadian socially responsible indexes, there is another interesting pair to look at. The Jantzi Social Index was established in 2000 and includes 60 Canadian companies that are screened for a broad set of environmental, social, and governance rating criteria. It is most closely comparable to the S&P/TSX 60 Index of large Canadian companies. I found it difficult to find comparisons of the performance of the two indices over time, but I did find two ETFs that are each designed to mimic these two indexes. They are both managed by the same company. The five-year period from 2009 to 2013 shows the socially-responsible ETF outperforming the regular one. Again, you'd get different results depending on which period you chose to look at.
I think the bottom line is that you can probably do better than we have done, because it seems like your options are better now. I don't think we can draw too many conclusions about long-term performance of these indices, but it looks like they perform similarly to the benchmark non-social indexes if you don't account for costs. From what I can see among the ETFs that I've looked at, you seem to pay about an extra 0.4% of your money in management expenses to own a socially responsible ETF instead of a similar ETF that is not socially responsible. All things being equal, therefore, I think you can probably expect to see 0.4% less per year in net returns from your investments, if you make this choice. A lot of people would consider that to be worthwhile. The main thing is to understand the cost and make an informed choice.
I would choose an ETF that is designed to mimic an index like the MSCI KLD 400 or the Jantzi Social Index. Those indexes seem to perform about as well as their corresponding non-social indexes, and you can get ETFs that mimic them and charge only about 0.5% to 0.55% per year in management expenses. If it's worth it to you to pay about 0.4% more in expenses in exchange for a cleaner conscience about your investing, you should look into it.
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