In the article Virtue is its Own Reward, billionaire Cliff Asnes argues that for the “virtuous” to do well, they have to accept a lower return and perhaps allow the “sinful” to get a higher return.
Two weeks ago, the East African Breweries Limited (EABL) #ticker:EABL listed the final series of its corporate bond complete with a (fixed-rate) 14.17 per cent icing on top. And as many celebrated the first corporate bond issue in the year, the same week also witnessed another celebration; the start of Ramadhan.
Pondering on the remarkable concurrence of events, this coincidence led me to a much nuanced subject: ethical investing. Knowing that our Muslim friends would have never touched the bond, it seemed logical to conclude that the so-called ethical investing comes at a cost.
But is it so? Are socially responsible investors just do-gooders doomed to miss-out on stellar opportunities? Or do they eventually win in the end? Great questions and here are my three cents on the table
For a long time, investing with a conscience has often been linked to accepting low returns.
In fact, a criticism long levelled against socially minded strategies is that they can’t, by their very nature, keep pace with the broader market.
This reasoning says that if you limit the sort of stocks/bonds you invest in, you limit your potential return and add to the riskiness of your investment.
In the article Virtue is its Own Reward, billionaire Cliff Asnes argues that for the “virtuous” to do well, they have to accept a lower return and perhaps allow the “sinful” to get a higher return.
To illustrate his point (and to bring context), let’s use the EABL example above. Assuming virtuous investors refused to bid for the EABL bond, its book runners would’ve been forced to re-adjust the rate higher.
Effectively, this would’ve punished EABL with an expensive bond but eventually awarded “sinful” investors with a higher return.
Put simply, if the virtuous are not raising the cost of capital to sinful projects, what are they doing?
Another example; if virtuous investors had taken a pass on the BAT-and-EABL train express, perhaps these stocks would’ve never delivered the 73 per cent average returns (2012-2016).
In all this, conscientious investor miss-out on gains and thus accepting lower returns as a necessary condition for their beliefs.
Great point, but I disagree with the conclusion. This is because there’s now plenty of evidence suggesting that investing with a conscience may not necessarily mean sacrificing returns.
One, Fortune’s list of the best 100 companies in the United States to work (read; socially-responsible), have been found to have outperformed the market by 1-2 per cent, on average, consistently, over long periods.
Two, a pioneer in socially responsible investing, Jerome Dodson has produced 13 per cent annualised returns over the past decade for his funds, versus eight per cent for the S&P 500 Index. \
Three, locally, back-testing a momentum index strategy (minus EABL & BAT #ticker:BAT) beats the NSE 20 share Index over a 14-year period.
So, in conclusion, excluding sectors such as tobacco (BAT), alcohol (EABL), oil dealers (Kenol #ticker:KENO /Total) and banks (Halal investing), may not be a bad idea after all. Letting your beliefs influence your investment approach can make you money.
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Note: The results are not exact but very close to the actual.
