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Canadian investors are not flocking to socially responsible mutual funds

by Wayne Cheveldayoff, 2004-08-26

When it comes to investing hard-earned money, Canadians and their investment advisors tend to stick with mutual funds that have shown consistent long-run returns.

This is probably the main reason why they are not flocking to socially responsible funds, which remain a small fraction of total fund assets in Canada.

The socially responsible sector has had a couple top-performing funds in recent years but average returns for the group have lagged, which is understandably a disappointment for those who seek a way to make their money work for good in the world.

Funds with socially responsible mandates usually screen out companies operating with sweatshops and child labor or are involved in pornography or the manufacture of alcohol, tobacco, or weapons. Some also screen for strong records of community involvement and exemplary environmental practices.

The largest socially responsible equity fund is the Investors Summa Fund, with $2.2 billion in assets. The fund matched the S&P/TSX total return index (+24.5 per cent) for the year to June 30 and has an enviable 10-year annual return of 10.8 per cent, a full point above the 9.8-per-cent average annual return for the index, according to statistics published by the Social Investment Organization, a non-profit body set up to promote and monitor socially responsible investing.

The other equity funds in this group are much smaller and many donít have five or 10-year records as they are relatively new. None have Morningstarís coveted five-star rating and only a couple have been awarded four stars (see www.morningstar.ca).

The Acuity Social Values Canadian Equity Fund, with only $20 million in assets, had an exceptional 39.8 per cent return in the year to June 30, and its three-year annual return was 13.2 per cent, well above the 5.2 per cent annual return recorded for the index.

But a larger Canadian equity fund in the group, the Ethical Growth Fund, with $444 million in assets, lagged behind with a one-year return of 16.9 per cent and a three-year annual return of one per cent Ė well behind what someone could have earned by simply buying an index fund.

The Acuity Clean Environment Equity Fund has $120 million in assets and a respectable return of 30.8 per cent over one year, but its technology-heavy portfolio didnít do well in prior years during the bubble melt-down and its 10-year annual return of 6.9 per cent is well back of the 9.8-per-cent return shown by the S&P/TSX total return index.

The sector has spawned its own Canadian index. The Jantzi Social Index, created by Michael Jantzi Research Associates in Toronto, consists of 60 Canadian companies that pass a set of social and environmental screens.

Meritas Mutual Funds has sponsored a mutual fund based on the Janzi Social Index. The fund, with only $25.6 million in assets, was up 22.4 per cent in the year to June 30 (versus the S&P/TSX total return index at +24.5 per cent) and showed an annual return of 3.4 per cent over three years (versus +5.2 per cent for the index).

The 11 Canadian equity funds listed by the Social Investment Organization in its latest quarterly newsletter showed average returns below the index of 21.9 per cent for one year and 3.7 per cent for three years.

The lone small-to-mid-cap Canadian equity fund on the list, called the Ethical Special Equity Fund, with $161 million in assets, has outperformed the BMO Nesbitt Burns Canadian Small Cap Index by a wide margin over three and five years. The fund showed returns of 38.2 per cent over one year (versus +41.1 per cent for the index) and annual returns of 25.1 per cent for three years and 18.4 per cent for five years (versus +12.7 per cent and +12.1 per cent, respectively, for the index).

The organization also lists U.S. equity, global equity, balanced, bond and money market funds available to Canadian investors. But it is mainly the same under-performing story with average returns for each of these sub-groups registering below the respective index.

With the lack of spectacular returns, it is unlikely that investment advisors would have socially responsible funds on their radar screens. Another factor is that the funds are relatively small and donít have the budgets to make a big marketing push to advisors.

While there may be the odd advisor who specializes in this sector (some are listed by the Social Investment Organization), the reality is that individual investors interested in this sector will have to do their own research.

A good place to start is at the Social Investment Organizationís website at www.socialinvestment.ca, where funds are listed and individuals can sign up for a membership for a modest fee and be entitled to receive a quarterly newsletter.

Some socially responsible funds advertise that there is no need to sacrifice returns when investing this way. But the historical record shows that if you want to do well on performance, you are going to have to choose carefully.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.


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©2004 Wayne Cheveldayoff