Managers Foresee Promising Growth In Green Mutual Funds
December 8, 2008
Everywhere you look these days, people are talking about green cars, green energy, greenhouse gases and even green mutual funds. This new demand for all things green is enough to make some money managers green with envy.
"You can't turn on the TV, read a newspaper or ride on a subway without hearing someone talking about green this or that," said Rob Thomas, founder and president of Social(k), a provider of socially responsible funds. "The awareness of sustainable, responsible behavior is growing, especially with the younger generation."
Socially responsible portfolio managers consider many factors when choosing companies for their funds, such as a company's environmental responsibility, community involvement, employment diversity, use of animal testing and protection of human rights. These funds adhere to environmental, social, moral or religious beliefs, typically excluding companies that produce weapons, alcohol, tobacco or gambling facilities, as well as countries with ties to terror or genocide.
Thomas said socially responsible funds use triple bottom-line accounting to select companies, rather than the single bottom-line accounting used by most funds.
"Single bottom-line accounting misses bad behavior," he said.
As an example, he said single bottom-line accounting would see that a certain timber company harvested a million more trees than the year before, sending profits soaring. Triple bottom-line accounting would discover that the company harvested all the trees of a small island and left the indigenous population completely without wood. Not only is such behavior irresponsible, it makes the timber company vulnerable to future lawsuits by the island's residents, he said.
Socially responsible funds screen in good behavior and screen out companies that exhibit questionable accounting practices like WorldCom and Enron, he said.
While the soaring cost of oil last summer skewed the average, Thomas said socially responsible investments (SRI) typically have matched or outperformed most indexes in short-term and long-term scenarios.
"I think SRI returns will continue to outperform traditional funds," Thomas said. "When the markets collapsed earlier this year, SRI funds didn't collapse as much."
The Obama Effect
Many money managers expect the shift toward socially responsible funds to increase, particularly after President-elect Barack Obama takes office next month.
"If Obama follows through on his commitment to green energy and green jobs, there will be a lot of focus on SRI," said Peter Kinder, president of KLD Research & Analytics. "There has been a lot of attention paid to what socially responsible investments have been doing for years. We expect to see major changes in the Obama Administration. The question is where he will act first and how soon."
Kinder said poor market conditions probably won't stimulate the creation of many products in the short term, but change is coming.
"I think his alternative energy, green jobs for all and job creation bill will bring a lot of awareness to those companies," Thomas said, noting that Obama wants to create 2.5 million jobs over the next two years by building alternative energy facilities and improving the nation's infrastructure.
While most investors think of green incentives as emotional, oftentimes they are simply more practical than traditional ways of doing business.
"In Chicago, the building permitting process can take nine months," Kinder noted. "But if you make it a green building, they shorten the permitting process to 30 days. A lot of builders are saying, 'Green, schmeen. I'll do whatever I have to do to shorten that process.'"
Bill Crager, president of Envestnet Asset Management, said cultural awareness has grown over the last 18-24 months, particularly after the market volatility of the past six months.
"The sustainability message has been pretty resilient," Crager said. "You can see it almost everywhere. Moderate investors are interested in green investments, and we have a portfolio built for them."
While relatively new to the SRI game, Envestnet recently launched the Envestnet Sustainability Platform, a suite of resources that provides SRI-themed products for mutual funds, 401(k)s, exchange-traded funds, separately managed accounts and unified managed accounts.
"We launched the platform with the idea that socially responsible investments have been mostly segment-oriented," Crager said. "Our belief is that sustainable investments will become mainstream. The Obama Administration will speed up the trend toward SRI."
Return of the Assets
"When we begin to come out of this recession/bear market, the money is going to come off the sidelines," Crager said. "I believe there will be a lot of money flowing into SRIs as assets come back."
Under Obama, the government will offer incentives to companies that innovate, and those companies will succeed, he said.
"Money will go to companies that are growing and have green jobs," Crager said. "I don't think this is a short-term fad, but rather a long-term trend."
KLD, best known for its Domini 400 Social Index that launched in 1990, recently teamed up with Jantzi Research to come up with the Global Environment 60 Index, designed to look at global trends that have a profound impact on capital markets, such as demographic shifts, industrialization of developing nations and climate change.
Kinder said KLD had been planning the index for years. Although this is a rough time to launch a new fund, the reception has been very positive, he said. It typically takes about three years of performance for people to see reliable results, he said, noting that the Domini 400 has nearly 20 years of performance data.
As socially responsible funds catch on in popularity, Kinder said he expects to see them become more mainstream and start to overlap with other funds.
"It will become more difficult to differentiate standard investment products from SRI," he said. "From an SRI standpoint, it means more competition."
"Ultimately, every firm will have some SRI capability," Crager said.
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