Thinking beyond oneself and one's immediate environment is looked upon as a good trait in any person. But when this logic is extended to mutual funds, one might find it surprising. "Shouldn't mutual funds be concentrating on giving returns to the customer?" is a question that comes to mind immediately. Yes, they should. But it makes a difference when those returns come from investing in companies who, besides making profits, also help the society in their own way.
Typically known as socially responsible investing, these funds follow a strategy that combines two seemingly diverse and irreconcilable objectives of maximising one's financial return, and doing social good at the same time. Such funds primarily aim at promoting the concepts of good corporate governance, human rights, and environmental protection, among others in the companies they invest in. Obviously, companies involved in alcohol, cigarette, gambling or manufacturing weapon are a big 'no'.
The basic strategies used by such funds include:
Screening: To exclude certain securities from their investment universe, based on social or environmental filters. For example, such funds do not include casino-related companies in their portfolio.
Divesting or removing stocks: To exclude companies from their existing portfolio, in case one of their holdings engages in a socially irresponsible act. For instance, a fund may sell the stock of a textiles company when there are reports that the company is engaging in child labour in a foreign country.
Shareholder activism: To involve efforts of the social investors that will influence a company's behaviour. SRI funds use their ownership rights to influence management through policy change suggestions. This advocacy is achieved through attending shareholder meetings, filing proposals, writing letters to management and exercising voting rights.
SRI investing has been in vogue in the West for the past thirty years. Today, the SRI universe in the USA aggregates over $ 2.3 trillion which is almost 10 per cent of the entire US market $24 trillion. The total number of funds have also increased to a great extent. As per the Social Investment Forum in 2005, there were 201 SRI mutual funds in the USA, as against just 55 in 1995.
As far as performance goes, The Domini Social 400 Index representing 400 SRI compliant companies in the USA has
returned 12 per cent a year between 1990 and September, 2007. Over the same period, the Standard & Poor 500 returned 11.49
per cent.
As far as India goes, SRI funds are just beginning to find their feet. At present, there is only on such fund, namely ABN Amro Sustainable Development Fund. Launched in the first quarter of 2007, this three year close-ended fund aims at
investing in companies that follow high disclosure policies relating to their environment, social and corporate governance parameters.
The fund has tied up with credit rating agency CRISIL to shortlist companies. CRISIL will rate all companies that form a part of Standard & Poor CNX 500 index on the basis of their disclosure standards across a number of factors under the ECG parameters.
ASDF invests 65 per cent of its corpus in companies that perform well in this rating exercise. However, final stock selection also depends on the fund manager's assessment of the future performance of these companies. Its performance so far has been rather tepid. It has returned 40.52 per cent till November 30, 2007, almost 8 per cent below the benchmark's (BSE 200) return of 48.20 per cent. Also, being close-ended one cannot invest in it today.
However, it is quite likely that this universe will expand considerably over the next few years. Before investing in such funds, you need to keep in mind a few things.
Understand the concept clearly: Check out the broad objectives of the scheme and the filters being employed for screening the investment universe. Invest only, if you truly believe that it offers a value proposition that is different from that offered by the mainstream diversified equity funds. Also, do not get swayed by your emotions while investing. Do not fall prey to schemes that try to appropriate your funds under the garb of SRI.
Avoid over-concentration: A SRI Fund can be treated as a variant of a thematic fund. Hence, do not commit more than a small portion of your investible resources for such funds.
Check the costs involved: Research the fundamentals and fees of the funds in which you are interested. Some items to consider include the level of the expense ratio, the entry and/or exit loads, and the fund manager's track record in managing other schemes within the same fund.
The writer is a certified financial planner.
