New choices for ethical investors

Investors are still fleeing from mutual funds according to the October figures, but some companies seem to feel that there’s a growing appetite for at least one type of fund: the ethical variety.

A total of nine new socially-responsible funds have been launched in recent weeks by two Vancouver-based companies, Ethical Funds and Phillips, Hager & North.

Integrity is a critical issue
“Corporate integrity is the top business issue at the beginning of the 21st century,” said Ethical Funds vice-president Margaret Yee in announcing a major expansion to her company’s line-up. “It’s evident that many retail investors believe mutual fund companies have a responsibility to actively lobby companies they invest in to adopt higher standards of corporate behaviour.”

At almost the same time as Ethical was expanding, the well-respected firm of Phillips, Hager & North took a big step into the field of socially-responsible investing (SRI) with the creation of four Community Values Funds. The company has managed SRI accounts for institutional investors for more than a decade but this is the first time they have made this expertise available tohe general public.

The two announcements increase by nine the range of choices available to people interested in SRI alternatives. Let’s take a look at each in more detail.

Ethical Funds
There are five new basic offerings in the Ethical group, plus two RRSP-eligible clones. The newcomers are designed to round out the Ethical product range and to allow investors to build a fully-diversified portfolio using only Ethical funds.

The move comes at a time when the group is under some pressure. Several of the company’s core funds have struggled recently and total assets under management fell by more than11 per cent over the 12 months to Oct. 31. The flagship Ethical Growth Fund, which places preservation of capital high on its priority list of objectives, has been especially disappointing. The fund lost almost 20 per cent in the six months to Oct. 31 and now shows below-average returns for all time periods out to ten years. The five-year average annual return is -4.6 per cent.

Another one-time winner, Ethical North American Equity Fund, is also in a terrible slump, with a six-month loss of 17 per cent and a three-year average annual loss of almost 20 per cent. Almost all stock funds have taken a beating, but this one has performed much worse than the averages of either the peer group or the benchmark index.

The company obviously hopes that some of the new entries will not only perform better but that they may keep investors in the fold who otherwise might have been tempted to jump ship.

Next page: Promising new funds

Two of the new funds look especially interesting:

  • The Ethical Canadian Dividend Fund, run by Regina-based Greystone Managed Investments. Most people have never heard of the company, but they have a very good track record. Lead manager Robert L. Vanderhooft previously did a good job with the GGOF Alexandria Canadian Balanced Fund before handing over the account to the Jones Heward investment team early this year.
  • The Ethical Global Growth Fund. It is run by a company called Marvin & Power Associates, another name with which most Canadian investors will be unfamiliar. However, this Delaware-based company has an excellent reputation as an international money manager. It has run the small Orbit World Fund since 1995 and the latest five-year average annual compound rate of return is an impressive 9.2 per cent, compared to an average loss of 0.7 per cent for the category. The same firm has also produced above-average results (although not as impressive) with the Renaissance International Growth Fund, which it has managed since 1996.

The other new entries are:

  • Ethical U.S. Special Equity Fund
  • Ethical International Equity Fund
  • Ethical European Equity Fund

The latter two have RRSP-eligible clones.

The Ethical Funds are sold through credit unions and can also be purchased from financial advisors. The new funds are all available now.

Phillips, Hager & North

PH&N is offering four funds in its Community Values series. Candidate companies for inclusion in the portfolios are assessed by Michael Jantzi Research Associates, a leading provider of social investment research. The selection criteria include the usual prohibitions against companies involved in the production or distribution of alcohol, tobacco, pornography, military weapons, and gambling. But they also include a requirement that any companies selected adhere to “strong corporate governance practices”, a reflection of the wide public concern about this issue. The four new funds are:
  • PH&N Community Values Bond Fund. This fund is modelled on the highly-successful PH&N Bond Fund, which is one of the best funds of its kind in the country. If the Community Values version produces anything approaching a comparable performance, it should be number one on your buy list.
  • PH&N Community Values Canadian Equity Fund. The model here is the PH&N Canadian Equity Fund, which is a pure Canadian fund with no foreign content. The original fund has been in a slump recently but the long-term performance is above average.
  • PH&N Community Values Global Equity Fund. I’m not excited about this one. The company has spent a lot of money in building up its internal international expertise, but so far the results aren’t there. The PH&N Global Equity Fund, upon which this is modelled, has been a below-average performer so far. You might want to take a pass.
  • PH&N Community Values Balanced Fund. This looks like an okay choice, but not a great one. The fund will use a similar asset allocation as the PH&N Balanced Fund. That one has been weak recently but over the longer term it has produced acceptable results.

It’s important to keep in mind that while the new entries are modelled on existing PH&N funds, the returns could be quite different because the SRI screens will dictate alternative stock and bond selections in some cases. It will be interesting to compare the results of the Community Values funds with the originals over time.