I had a good sandwich from Pressed again yesterday. Kerry suggested I try it after reading in her favorite Daily Candy that funds from sales were being directed to Katrina victims. Sitting in International Place trying to be heard over 2 protesters with megaphones complaining about the CO from the Big Dig ventilation chimneys (I think). In the most polite fashion, the 30 or so in the chairs stepped around and looked past the curiosity and gamely stuck to eating sandwiches and speaking - loudly!
I lunched with Ben Lavine CFA ex-Wilshire Associates just in town from UCLA and joining BatteryMarch. Ben led the Manager Research Group in late 2004 team to publish the February 2005 "Active Manager Survey Socially Responsible Investing". The impetus was to check what active managers outside of those with specific SRI mandates like Catholic Funds were doing, to create a market view for Wilshire and clients if they needed to give advice or make selection recommendations. Some impetus came from the Horace Man Fund, a philanthropic investment fund Wilshire works with.
Wilshire purposely focused on active mandates given that the marketplace for passive socially-responsible investment providers is fairly well known.
Wilshire highlighted:
Active SRI is not widespread within the traditional institutional investment community. Such mandates mainly reflect a manager’s accommodation of client-specific requests on social restrictions.
Managers typically view the social aspects of these mandates as divorced from the investment process. Active managers are primarily focused on identifying investment opportunities as defined by superior financial and operating performance.
Most firms do not dedicate resources, outside of retaining data vendors, to run socially responsible mandates. Most execute the process using a separate overlay and do not employ separate proxy voting procedures unless directed by the client.
Few managers can objectively measure the performance impact from the social restrictions. None can demonstrate whether the mandates are achieving optimal ‘social objectives’ versus a baseline benchmark. In other words, how does a client know whether their portfolio is achieving an optimal level of social utility given a certain level of tracking error against the market benchmark or a socially responsible benchmark?
Finally, Wilshire did not elicit survey responses from active investment entities whose primary focus is to invest in a socially conscious manner either for reasons related to moral principals or for financial value-added (so-called ‘angel effect’). The survey just focuses on firms who provide traditional active management services to the institutional market that are approached to run socially responsible mandates.
The results from the question on sources of SRI research was enlightening:
39% came from "client-directed", and 22% from "internal research", with KLD at 22%, Innovest at 17%, ICCR at 6%, IRRC at 28% and ISS with 39%, obvioulsy reflecting the corporate govenrance business.
Common socially-restricted categories include consumer products (tobacco, alcohol), weapons manufacturing, environmental scorecards, and corporate governance. Screening for Tobacco was at 100%, Environment at 29% and Nuclear Power 41%.
Ben mentioned the survey of 70+ possible managers was narrowed to a select group of 36 money managers, with response from 32 of which 18 indicated managing at least one SRI mandate. The money managers ranged from mainstream like Bernstein to SRI shops like Dreyfus, and included big players State Street and BGI. For purposes of this survey, Wilshire defined active socially responsible mandates as client accounts which have restrictions on investments in securities with pre-specified exposures to certain societal activities.
Wilshire excluded religious-oriented mandates (e.g., Catholic Healthcare Trusts) from consideration given their more refined set of criteria that might not be applicable to broader socially responsible mandates. Requests were only made for responses for active investment mandates given that the marketplace for passive index vehicles is fairly well known (e.g. Domini, Calvert, Parnassus). Wilshire did not elicit survey responses from active investment entities whose primary focus is to invest in a socially conscious manner either for reasons related to moral principals or for financial value-added (so-called ‘angel effect’). This survey just focuses on firms who provide traditional active management services to the institutional market who are approached to run socially responsible mandates.
Ben was most impressed with BGI's approach in partnership with KLD's Social Select Index launched 31 January 2005. The first iShares® ETF for Socially Responsible Investors tracks KLD's Select Social Index, that seeks to optimize socially responsible factors while managing risk, making it much more appealing to benchmark-driven institutional investors. As opposed to screening out whole sectors - something that has punished Domini Social Index 400 in the past 18 months - the SSI uses an under-weighting approach to problem sectors, trying to be more quantitative about degrees of CSR.
Domini Social Equity's overweight to in technology stocks produced outperformance in the late 1990s, but underweight holdings of energy and utility stocks have hurt recently: ''It's kind of a double whammy that put them near the bottom of their category," David Kathman, a Morningstar analyst who follows the Domini Social Equity fund, was reported as saying in August in the Boston Globe [BOSTON CAPITAL The price of conscience By Steven Syre, Globe Columnist August 2, 2005].
The challenge to screening has always been the cuts a regular portfolio will take, especially some of the overlap for large cap value managers. Ben thinks the market has already voted on the poor corporate performance of the firm, and that includes environmental, governance and other classic SRI factors. My recent experience with a screening product for a Philadephia Separate Accounts sponsor product this Summer receiving a monthly update of tickers was that the 9 issue areas produced a 52% screen out of a R1k Large Cap manager model portfolio. That explains why many wealth managers simply chop off screening impact at 10% of portfolio to keep sub-advisors in the Separate Accounts programs happy. SRI is a "necessary evil" I was told with a smile.
Ben thinks some of the undervalued research Wilshire's survey presented was the tracking error around benchmarks. He thinks too few investors explore the impact of the SRI factors in their portfolio.
My biggest takeaway was the need for "SRI attribution" and the ability to measure one SRI fund or manager against another. I am intrigued by the opportunities that these present.
I look forward to reading Bill Baue's article in Business Ethics Meet the Faces Behind 5 Great SRI Mutual Funds which profiles five SRI money managers who invest for stellar performance and social justice and "in the top ranks of mutual fund performance, and who fuse financial discipline with attention to social justice and ecological sustainability", including Jack Robinson, Winslow Green Growth Fund; Diane Keefe, Pax World High Yield Fund; John Montgomery, Calvert Large Cap Growth Fund; John Rogers, Ariel Appreciation Fund; and Ingrid Dyott, Neuberger Berman Socially Responsive Fund.
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