ESG outperforming - will you add any ESG funds to your portfolio?

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JacobTeach
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ESG outperforming - will you add any ESG funds to your portfolio?

Post by JacobTeach »

https://www.bloomberg.com/graphics/2020 ... onscience/

There are factorheads on this board that tilt their portfolio to value, small cap value, what have you.

Do any of you tilt your portfolio to ESG for some alpha? Or is it purely an ethical decision?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by aristotelian »

ESG underperformed for years when oil was up, now it is overperforming while oil is down. I Assume the market has priced in the probabilities either way. Any guess would just be speculation. The best reason for ESG is if you simply don't like the idea of profiting from those companies and you think their screening criteria are sufficient.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

This is just active management in another guise, IMO. I'll stick with broad-based, capitalization-weighted index funds and capture the returns of all corporations rather than a selective subset based on questionable criteria.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

Whoa.

I did, in fact, do ESG investing--or SRI, socially responsible investing, as it was then called--for many years, 1990s and 2000s mostly. More on that below. I'm sympathetic to ESG investing.

Regardless of the pros and cons of ESG investing, I think seeing one article saying "The Biggest ESG Funds Are Beating the Market" would be an awful reason to add ESG funds. By the way, the title should be "The Biggest ESG Funds Have Been Beating the Market." This is just performance chasing.

The appeal of having your cake and eating it too--doing well by doing good--is strong, but doesn't it feel like the kind of thing that must be too good to be true?

What's missing from their table is expense ratio; shame on Bloomberg! A quick survey, expense ratio and Morningstar's characterization of "fee level" given the fund's category.

MGGPX, 1.270%, above average.
BIAWX, 0.880%, average.
MIOPX, 1.340%, above average.
CSIEX, 0.990%, below average.
AVEPX, 0.970%, above average.
PNOPX, 1.040%, average.
AMAGX, 1.030%, above average.
MFAPX, 1.350%, above average.
PGWAX, 1.000%, below average.
IMANX, 1.340%, high.

So what we have here is ten actively managed funds with expense ratios in 1% territory, not a single one that is "low" cost, and only three "below average." Simplistic as it seems, Morningstar has found over and over again that the expense ratio is by far the single most reliable predictor of future performance.

To me it is not credible that ESG investing would pay off reliably and quickly in the short run, and totally incredible that it could overcome a 1% expense ratio.

So, my own experience. I used an actively managed balanced fund, Pax World (PAXWX); a (formerly) index fund, DSEFX, I forget its former name, it changed to active management around 2002 or so; the Vanguard FTSE Social Index fund; and the TIAA-CREF Social Choice "account." No regrets about any of 'em, but a posting on Bogleheads suggest we go over our portfolios and multiply holdings by expense ratios to get the actual number of dollars we were losing to expenses in each holding. At the time I was holding PAXWX and noticed that it was costing me more than the rest of my portfolio combined. I decided to drop it.

PAXWX was a great example of your ordinary, perfectly good, decently managed active fund, with about a 1% expense ratio. It held meaningful concentrations in midcaps and international stocks. And, during the tech boom, a lot of tech firms passed the SRI screens and PAXWX and others were tech-heavy during the tech boom. Compared to the Vanguard Balanced Index Fund, PAXWX was getting a little more return and taking a little more risk; it outperformed VBINX on the way up, 1995-2000, then underperformed on the way down. A leapfrogging performance, no real way to tell for sure if PAXWX was better, but it was easy to tell that it was costing more. So. Eh.

IMHO, the big things to ask about any ESG fund are:

1) Is their screen a reasonable match for your principles? To point out the obvious, two of them use religious screens and, probably would be a better match than the others for investors who adhere to those two respective religions.

2) Does the fund, or its index provider if it is tracking an ESG index, do anything beyond screening? For example, the Vanguard FTSE Social Index Fund tracks the FTSE4Good index, and FTSE (says that) it tries to influence corporate behavior--for example, by telling companies that are close to passing their screens what they need to do to pass them. Is it meaningful? Is it effective? I don't know, but they are not just sitting in an office and selecting stocks.
Last edited by nisiprius on Fri Jan 31, 2020 9:45 am, edited 2 times in total.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by columbia »

nisiprius wrote: Fri Jan 31, 2020 7:28 am Whoa.

I did, in fact, do ESG investing--or SRI, socially responsible investing, as it was then called--for many years, 1990s and 2000s mostly. More on that below. I'm sympathetic to ESG investing.

Regardless of the pros and cons of ESG investing, I think seeing one article saying "The Biggest ESG Funds Are Beating the Market" would be an awful reason to add ESG funds. By the way, the title should be "The Biggest ESG Funds Have Been Beating the Market." This is just performance chasing.

The appeal of having your cake and eating it too--doing well by doing good--is strong, but doesn't it feel like the kind of thing that must be too good to be true?

What's missing from their table is expense ratio; shame on Bloomberg! A quick survey, expense ratio and Morningstar's characterization of "fee level" given the fund's category.

MGGPX, 1.270%, above average.
BIAWX, 0.880%, average.
MIOPX, 1.340%, above average.
CSIEX, 0.990%, below average.
AVEPX, 0.970%, above average.
PNOPX, 1.040%, average.
AMAGX, 1.030%, above average.
MFAPX, 1.350%, above average.
PGWAX, 1.000%, below average.
IMANX, 1.340%, high.

So what we have here is ten actively managed funds with expense ratios in 1% territory, not a single one that is "low" cost, and only three "below average." Simplistic as it seems, Morningstar has found over and over again that the expense ratio is by far the single most reliable predictor of future performance.

To me it is not credible that ESG investing would pay off reliably and quickly in the short run, and totally incredible that it could overcome a 1% expense ratio.

So, my own experience. I used an actively managed balanced fund, Pax World (PAXWX); a (formerly) index fund, DSEFX, I forget its former name, it changed to active management around 2002 or so; the Vanguard FTSE Social Index fund; and the TIAA-CREF Social Choice "account." No regrets about any of 'em, but a posting on Bogleheads suggest we go over our portfolios and multiply holdings by expense ratios to get the actual number of dollars we were losing to expenses in each holding. At the time I was holding PAXWX and noticed that it was costing me more than the rest of my portfolio combined. I decided to drop it.

PAXWX was a great example of your ordinary, perfectly good, decently managed active fund, with about a 1% expense ratio. It held meaningful concentrations in midcaps and international stocks. And, during the tech boom, a lot of tech firms passed the SRI screens and PAXWX and others were tech-heavy during the tech boom. Compared to the Vanguard Balanced Index Fund, PAXWX was getting a little more return and taking a little more risk; it outperformed VBINX on the way up, 1995-2000, then underperformed on the way down. A leapfrogging performance, no real way to tell for sure if PAXWX was better, but it was easy to tell that it was costing more. So. Eh.

IMHO, the big things to ask about any ESG fund are:

1) Is their screen a reasonable match for your principles? To point out the obvious, one of them uses a religious screen, and, for investors of that religion, probably would be a better match than the others.

2) Does the fund, or its index provider if it is tracking an ESG index, do anything beyond screening? For example, the Vanguard FTSE Social Index Fund tracks the FTSE4Good index, and FTSE (says that) it tries to influence corporate behavior--for example, by telling companies that are close to passing their screens what they need to do to pass them. Is it meaningful? Is it effective? I don't know, but they are not just sitting in an office and selecting stocks.
The Vanguard US ESG fund has an expense of 0.12%; the above percentages are <something> in that light.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by JacobTeach »

I know past isn’t prologue, but the funds in the article have beaten the S&P in total return, which includes fees?

Even adjusting for a ~1% fee, it does seem like they still outperform per the data at the end of the article.

Lastly, they’re definitely cherry picking the best funds. Is there a statistic on what percentage of ESG funds overall have beaten the S&P?

I only tested a few, but portfolio visualizer also confirms they have outdone the S&P.

Part of me thinks of it this way - if it makes sense to tilt to small cap (which I don’t do), it might also make sense to tilt to ESG (way of the future and all that)?

That being said, I should include a disclaimer that I also do believe in tilting a bit to tech.
nisiprius wrote: Fri Jan 31, 2020 7:28 am Whoa.

I did, in fact, do ESG investing--or SRI, socially responsible investing, as it was then called--for many years, 1990s and 2000s mostly. More on that below. I'm sympathetic to ESG investing.

Regardless of the pros and cons of ESG investing, I think seeing one article saying "The Biggest ESG Funds Are Beating the Market" would be an awful reason to add ESG funds. By the way, the title should be "The Biggest ESG Funds Have Been Beating the Market." This is just performance chasing.

The appeal of having your cake and eating it too--doing well by doing good--is strong, but doesn't it feel like the kind of thing that must be too good to be true?

What's missing from their table is expense ratio; shame on Bloomberg! A quick survey, expense ratio and Morningstar's characterization of "fee level" given the fund's category.

MGGPX, 1.270%, above average.
BIAWX, 0.880%, average.
MIOPX, 1.340%, above average.
CSIEX, 0.990%, below average.
AVEPX, 0.970%, above average.
PNOPX, 1.040%, average.
AMAGX, 1.030%, above average.
MFAPX, 1.350%, above average.
PGWAX, 1.000%, below average.
IMANX, 1.340%, high.

So what we have here is ten actively managed funds with expense ratios in 1% territory, not a single one that is "low" cost, and only three "below average." Simplistic as it seems, Morningstar has found over and over again that the expense ratio is by far the single most reliable predictor of future performance.

To me it is not credible that ESG investing would pay off reliably and quickly in the short run, and totally incredible that it could overcome a 1% expense ratio.

So, my own experience. I used an actively managed balanced fund, Pax World (PAXWX); a (formerly) index fund, DSEFX, I forget its former name, it changed to active management around 2002 or so; the Vanguard FTSE Social Index fund; and the TIAA-CREF Social Choice "account." No regrets about any of 'em, but a posting on Bogleheads suggest we go over our portfolios and multiply holdings by expense ratios to get the actual number of dollars we were losing to expenses in each holding. At the time I was holding PAXWX and noticed that it was costing me more than the rest of my portfolio combined. I decided to drop it.

PAXWX was a great example of your ordinary, perfectly good, decently managed active fund, with about a 1% expense ratio. It held meaningful concentrations in midcaps and international stocks. And, during the tech boom, a lot of tech firms passed the SRI screens and PAXWX and others were tech-heavy during the tech boom. Compared to the Vanguard Balanced Index Fund, PAXWX was getting a little more return and taking a little more risk; it outperformed VBINX on the way up, 1995-2000, then underperformed on the way down. A leapfrogging performance, no real way to tell for sure if PAXWX was better, but it was easy to tell that it was costing more. So. Eh.

IMHO, the big things to ask about any ESG fund are:

1) Is their screen a reasonable match for your principles? To point out the obvious, one of them uses a religious screen, and, for investors of that religion, probably would be a better match than the others.

2) Does the fund, or its index provider if it is tracking an ESG index, do anything beyond screening? For example, the Vanguard FTSE Social Index Fund tracks the FTSE4Good index, and FTSE (says that) it tries to influence corporate behavior--for example, by telling companies that are close to passing their screens what they need to do to pass them. Is it meaningful? Is it effective? I don't know, but they are not just sitting in an office and selecting stocks.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Uncorrelated »

In the Netherlands, ESG funds are highly popular because the 3 cheapest funds available are ESG funds (Northern Trust Custom ESG equity index, ACTIAM verantwoord aandelen wereld, NN Enhanced Index Sustainable Equity Fund). They are cheaper (~0.3%) than UK Vanguard funds due to local tax laws, and US vanguard funds can't be brought because of EU laws. It's really dumb and annoying.

I recommend those funds because they are cheaper. I won't be recommending ESG funds as a type of factor investment until there is academic consensus that the ESG factor is as strong as size/value, I suspect we have to wait at least 20 years before the first papers start rolling in.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by anil686 »

No I would not be for mine. I can see why one would though because you filter out oil and gas which has been a drag on returns since basically 2013 - maybe longer. the problem is that the fund company is the one in charge of defining ESG and that can change at anytime. So what happens if google, or apple, or amazon are determined not to be ESG friendly? ESG has benefited by being tied in with tech/large growth but that can change. JMO though...
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by columbia »

anil686 wrote: Fri Jan 31, 2020 8:37 am No I would not be for mine. I can see why one would though because you filter out oil and gas which has been a drag on returns since basically 2013 - maybe longer. the problem is that the fund company is the one in charge of defining ESG and that can change at anytime. So what happens if google, or apple, or amazon are determined not to be ESG friendly? ESG has benefited by being tied in with tech/large growth but that can change. JMO though...
Big Tech eats a lot of electricity. So are they using nuclear and how does that now and in the future comport with ESG?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

JacobTeach wrote: Fri Jan 31, 2020 8:34 am I know past isn’t prologue, but the funds in the article have beaten the S&P in total return, which includes fees?
Yes, they have.

Thanks, I think, to the SEC and pesky "regulations," the "returns" that mutual funds published are always after fees. What you see is what you get. I have little doubt that mutual funds would publish returns before expenses if they were allowed to, but they aren't. They don't cheat in that particular way.

I once went to the trouble of checking that in one of my own accounts that I hadn't touched for a while, apart from reinvesting dividends, and it matched.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

columbia wrote: Fri Jan 31, 2020 9:02 am
anil686 wrote: Fri Jan 31, 2020 8:37 am No I would not be for mine. I can see why one would though because you filter out oil and gas which has been a drag on returns since basically 2013 - maybe longer. the problem is that the fund company is the one in charge of defining ESG and that can change at anytime. So what happens if google, or apple, or amazon are determined not to be ESG friendly? ESG has benefited by being tied in with tech/large growth but that can change. JMO though...
Big Tech eats a lot of electricity. So are they using nuclear and how does that now and in the future comport with ESG?
Perhaps in the same way that Alphabet can data-mine and gather personal information about hundreds of millions of people, all with only the purest of socially-conscious intentions, of course. Or Apple can use extremely toxic chemicals and heavy metals, and gobs of plastic, in each and every product it sells, all with a pure heart. These ESG lists are quite arbitrary, designed to make buyers of funds feel woke, and pry open their wallets. Oh, well. There is a seller for every willing buyer of a shiny product.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Portfolio7 »

I've been told by smarter people than I that a lot of ESG funds have a modest tilt to growth, which would give them an advantage over the last decade.

If investing in ESG, I would do it out of conviction, not performance chasing.

We have 5% in the Vanguard FTSE ESG fund, and have for the 2-3 years it's been available in my 401k... mostly so I can tell DW that yes, we are invested in an ESG fund. The performance of late is a bonus.

My lack of excitement at ESG funds comes in part from realizing they all have their own standards, which may not be my standards. Also, you can't convince me that a lot of 'social good' happens in shades of gray, vs black and white. That's ok, I'm willing to do a little encouraging of the trend.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Texanbybirth »

I've considered Vanguard's ESG Fund for a while now as a piece of our portfolio. It's actively managed, pretty low cost (55bps), and it's run by the Wellington group. I'm surprised it doesn't have any Apple, at least not in the top ten.

Here's a Vanguard paper on ESG investing, albeit a little dated.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

Portfolio7 wrote: Fri Jan 31, 2020 10:00 am...
I've been told by smarter people than I that a lot of ESG funds have a modest tilt to growth, which would give them an advantage over the last decade...
Seven of the funds mentioned in the article are US funds. Morningstar places all of the them within their "large growth" category.

In the article itself you can see that four of the seven are benchmarked to growth indexes. Two actually have "growth" in their fund names (Ave Maria Growth Fund, Amana Growth Fund), and, though benchmarked to the S&P 500, probably shouldn't be.

So another indication that the article is garbage is that they compare all of these funds to the S&P 500 index. That's just an inappropriate comparison. Quite possibly many of them did beat appropriate benchmarks, but the article doesn't tell us.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by KyleAAA »

columbia wrote: Fri Jan 31, 2020 9:02 am
anil686 wrote: Fri Jan 31, 2020 8:37 am No I would not be for mine. I can see why one would though because you filter out oil and gas which has been a drag on returns since basically 2013 - maybe longer. the problem is that the fund company is the one in charge of defining ESG and that can change at anytime. So what happens if google, or apple, or amazon are determined not to be ESG friendly? ESG has benefited by being tied in with tech/large growth but that can change. JMO though...
Big Tech eats a lot of electricity. So are they using nuclear and how does that now and in the future comport with ESG?
They do a lot of things. Microsoft just made big waves by promising to be carbon negative by 2030. SAP aims to be carbon neutral by some date. I'm sure most of then others have similar public goals.

They have a detailed plan for how they're going to get there, too.
https://blogs.microsoft.com/blog/2020/0 ... e-by-2030/
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Scooter57 »

The stocks in these supposedly more socially conscious funds include quite a few companies whose ethics verge on the criminal.

Merck sold Vioxx knowing it was harming people. Until it's blockbuster Lipitor went off patent, none of the known bad news about its significant side effects hit the news. One month after the patent expired we learned that LIpitor raises the risk of diabetes significantly. What a coincidence.

One of its other blockbusters has some very troubling side effects which the company has brushed under the rug and which will only be known when that drug goes off patent. Like all drug companies, they manipulate drug prices and cut sweetheart deals with Pharmacy Benefit Managers so people in the US without health coverage pay 10 times more for the identical drug than people do in other countries. How is this socially responsible?

Accenture? The company previously known as Anderson Consulting, before accounting scandals caused it to assume a new identity?

NextEra, owners of the Seabrook Nuclear plant and several others??????? (Maybe you have to be older to remember just how socially conscious the building of Seabrook was.)

I have seen quite a few drug companies in other supposedly socially conscious funds, including a couple that have had huge settlements for selling products their execs knew were maiming and killing patients.

This is a marketing pitch for ideologues who don't look at what their funds actually hold but fall for the Greenwashing gimmick. If these funds catch on, their constituent funds will be bid up higher than makes sense and eventually lag the market leaving their investors to chase whatever is the next fad investment.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by KyleAAA »

Scooter57 wrote: Fri Jan 31, 2020 3:07 pm The stocks in these supposedly more socially conscious funds include quite a few companies whose ethics verge on the criminal.

Merck sold Vioxx knowing it was harming people. Until it's blockbuster Lipitor went off patent, none of the known bad news about its significant side effects hit the news. One month after the patent expired we learned that LIpitor raises the risk of diabetes significantly. What a coincidence.

One of its other blockbusters has some very troubling side effects which the company has brushed under the rug and which will only be known when that drug goes off patent. Like all drug companies, they manipulate drug prices and cut sweetheart deals with Pharmacy Benefit Managers so people in the US without health coverage pay 10 times more for the identical drug than people do in other countries. How is this socially responsible?

Accenture? The company previously known as Anderson Consulting, before accounting scandals caused it to assume a new identity?

NextEra, owners of the Seabrook Nuclear plant and several others??????? (Maybe you have to be older to remember just how socially conscious the building of Seabrook was.)

I have seen quite a few drug companies in other supposedly socially conscious funds, including a couple that have had huge settlements for selling products their execs knew were maiming and killing patients.

This is a marketing pitch for ideologues who don't look at what their funds actually hold but fall for the Greenwashing gimmick. If these funds catch on, their constituent funds will be bid up higher than makes sense and eventually lag the market leaving their investors to chase whatever is the next fad investment.
I don't think it would make sense for ESG funds to take into account things that happened 10+ years ago. Companies change, often quickly. What matters is the current situation and the future based on whatever criteria the fund is evaluating. I can't think of a justification for why an accounting scandal forcing a name change almost 20 years ago should have any impact on a current ethics evaluation. Besides, the criteria used to evaluate companies are strict and usually mechanical. If your favored issue isn't filtered for, you shouldn't be surprised they show up in the fund. These funds are universally transparent about how they define ethical behavior. Just because you think their definition isn't perfect doesn't mean it's just a marketing pitch.

It certainly isn't just a marketing pitch and those who buy them aren't foolish ideologues.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by columbia »

Scratching into the rationale of these funds can get political awfully quick.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

columbia wrote: Fri Jan 31, 2020 3:53 pm Scratching into the rationale of these funds can get political awfully quick.
That, I think, merely a byproduct of their own creation.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Scooter57 »

KyleAAA wrote: Fri Jan 31, 2020 3:37 pm I don't think it would make sense for ESG funds to take into account things that happened 10+ years ago. Companies change, often quickly. What matters is the current situation and the future based on whatever criteria the fund is evaluating. I can't think of a justification for why an accounting scandal forcing a name change almost 20 years ago should have any impact on a current ethics evaluation. Besides, the criteria used to evaluate companies are strict and usually mechanical. If your favored issue isn't filtered for, you shouldn't be surprised they show up in the fund. These funds are universally transparent about how they define ethical behavior. Just because you think their definition isn't perfect doesn't mean it's just a marketing pitch.

It certainly isn't just a marketing pitch and those who buy them aren't foolish ideologues.
The drug companies are up to their usual tricks right now.

There are so many criteria that could be applied to companies to select ones that are actually ethical, but they can't be determined by having corporate executives fill in forms stating whether or not they recycle their garbage or use electric cars.

These funds are pitched to a certain demographic and it is impossible to discuss that demographic in detail here without getting the thread locked.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by KyleAAA »

Scooter57 wrote: Fri Jan 31, 2020 6:06 pm
KyleAAA wrote: Fri Jan 31, 2020 3:37 pm I don't think it would make sense for ESG funds to take into account things that happened 10+ years ago. Companies change, often quickly. What matters is the current situation and the future based on whatever criteria the fund is evaluating. I can't think of a justification for why an accounting scandal forcing a name change almost 20 years ago should have any impact on a current ethics evaluation. Besides, the criteria used to evaluate companies are strict and usually mechanical. If your favored issue isn't filtered for, you shouldn't be surprised they show up in the fund. These funds are universally transparent about how they define ethical behavior. Just because you think their definition isn't perfect doesn't mean it's just a marketing pitch.

It certainly isn't just a marketing pitch and those who buy them aren't foolish ideologues.
The drug companies are up to their usual tricks right now.

There are so many criteria that could be applied to companies to select ones that are actually ethical, but they can't be determined by having corporate executives fill in forms stating whether or not they recycle their garbage or use electric cars.

These funds are pitched to a certain demographic and it is impossible to discuss that demographic in detail here without getting the thread locked.
Yes, there are many criteria. The ESG funds don't cover all of them. That says nothing about whether or not these funds serve a valuable purpose and it doesn't say anything about the type of investor who would want to use them.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

KyleAAA wrote: Fri Jan 31, 2020 6:14 pm
Scooter57 wrote: Fri Jan 31, 2020 6:06 pm
KyleAAA wrote: Fri Jan 31, 2020 3:37 pm I don't think it would make sense for ESG funds to take into account things that happened 10+ years ago. Companies change, often quickly. What matters is the current situation and the future based on whatever criteria the fund is evaluating. I can't think of a justification for why an accounting scandal forcing a name change almost 20 years ago should have any impact on a current ethics evaluation. Besides, the criteria used to evaluate companies are strict and usually mechanical. If your favored issue isn't filtered for, you shouldn't be surprised they show up in the fund. These funds are universally transparent about how they define ethical behavior. Just because you think their definition isn't perfect doesn't mean it's just a marketing pitch.

It certainly isn't just a marketing pitch and those who buy them aren't foolish ideologues.
The drug companies are up to their usual tricks right now.

There are so many criteria that could be applied to companies to select ones that are actually ethical, but they can't be determined by having corporate executives fill in forms stating whether or not they recycle their garbage or use electric cars.

These funds are pitched to a certain demographic and it is impossible to discuss that demographic in detail here without getting the thread locked.
Yes, there are many criteria. The ESG funds don't cover all of them. That says nothing about whether or not these funds serve a valuable purpose and it doesn't say anything about the type of investor who would want to use them.
How much does the performance of "ESG" funds depend upon the performance of the tech sector, much like the performance of high-dividend-paying stocks depends upon the performance of value stocks?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by MnD »

Here's what I posted recently in a thread on an ESG equity 2-fund my daughter and I set up for her. The new VG low-cost all-cap index ESG funds (and all-country for the international) are available in ETF format only which is a strong hint that this is a product that is being targeted at and consumed by younger investors.

We may also be reinvesting DW's 401-K rollover which showed up yesterday in these two funds - her call.
MnD wrote: Sat Dec 28, 2019 10:50 am My daughter and I revamped her portfolio yesterday to a two fund ESG for equity across taxable and Roth IRA. She desired simplification, ability to continue to make purchases with no fee or commission, index ETF's with low ER, no over-weighting of US with all cap all country and ESG if possible. This is probably the last year she will be in the 0% capital gains bracket as she's finishing up her PhD, so now was the time. No bonds with money market instead as her desire for a bond position in her portfolio is nil at her age, but her need for cash may be significant given relocation/career related expenses in the next 12 months.

Went with:
40% ESGV - Vanguard ESG U.S. Stock ETF (.12 ER) replacing SCHB
40% VSGX - Vanguard ESG International Stock ETF (.17 ER) replacing SCHF, SCHE and SCHC
20% SWVXX - Schwab money market prime

Despite not a lot of interest in investing she had heard about the relatively new Vanguard ESG index ETF offerings prior to my suggestion to simplify things using them. Despite a short track record the funds appeared to do well in both 4Q 2018 declines and 2019 run up relative to total stock and total international stock. Given the increasing interest in ESG for core holdings especially among younger investors, I expect to see a lot of growth for these funds and a steady drop in expenses. Interestingly, Vanguard does not offer traditional mutual fund shares of these funds.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by ronno2018 »

I switched from VTI to ESGV recently and performance seems better most days. I am starting to move from VEU to VSGX now too. Most days it does better as well, but one day (due to oil maybe?) it was dramatically worse.

Life is not fair and the good guys don't always win, but my hope is supporting decent and thoughtful corporate behavior over time will result in slightly better returns.

I also benefit psychologically from thinking I am making a slight difference, but no expectations of better returns or a better world.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Kenkat »

They lost me at ESG. Or rather, not saying in paragraph 1 what ESG stands for. Did I miss it or do these people need a refresher in Elements of Style?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

Kenkat wrote: Fri Jan 31, 2020 7:22 pm They lost me at ESG. Or rather, not saying in paragraph 1 what ESG stands for. Did I miss it or do these people need a refresher in Elements of Style?
Just one more way in which this article is just plain bad.

Let me make a quick test. I haven't tried it yet. Let's see if Vanguard explains the term on their web page for ESGV.
Product summary
  • Seeks to track the performance of the FTSE US All Cap Choice Index.
  • Market cap weighted index composed of large-, mid-, and small-capitalization stocks.
  • Screened for certain environmental, social, and corporate governance (ESG) criteria.
  • Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power.*
  • Excludes certain stocks of companies that do not meet standards of U.N. global compact principles and companies that do not meet diversity criteria.*
  • Follows a passively managed, full-replication approach.
All is well.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Artsdoctor »

Morningstar just interviewed their director of research regarding ESG funds. He covered the history and did a nice job laying out the state of current investments and future goals. If you're at all interested in investing using ESG funds, listening might be helpful:

https://www.morningstar.com/podcasts/the-long-view/39
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

I will not and plan to stay the course with Total Stock and Total Bond.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

Interesting article in The Wall Street Journal recently on how the weighting in ESG funds may be in fact higher than the weighting in Total Stock.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by stlutz »

I think one of the unique things about ESG is that it is focused on long-term performance. The types of things they are looking for don't necessarily impact short-term results.

A company that pollutes a lot may do just fine for a good long while. Eventually they will find themselves in trouble. If they don't have a diverse management team, they are probably missing out on a lot of talent--that can work for a while. Bad corporate governance also can catch up with a company over a 20 year period.

Now, those factors may already be priced in. Or we may find that people end up overpaying for "good" companies, which of course has happened with a lot of other ways of defining "good" as well. While ESG may identify sustainable companies that will be successful 20 years from now, that's not the same thing as identifying outperforming stocks.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by stlutz »

And BTW, thanks to the OP for starting the thread. ESG is as hot of a topic now as factor investing was 2 or 3 years ago, so it's good to see more discussions about it on Bogleheads.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

How large is the Vanguard fund?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by JoMoney »

No plans to add one, depending on how ESG was defined I think it's possible there could be some definition of "ESG" I could imagine considering -- but I haven't seen one that I agree with. More likely I would go back to rolling my own individual stock portfolio if that was a way I wanted to engage with my investments.

Regarding the premise of ESG "outperforming" ... Is this a specific ESG fund, or is there a ESG index? I haven't seen a standardized ESG index by which to compare it to the Anti-ESG portfolio (whatever that would be).
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

abuss368 wrote: Fri Jan 31, 2020 8:48 pm How large is the Vanguard fund?
$874 million in assets since inception in 09/18/2018, less than five months ago.

By comparison, the much-discussed WisdomTree NTSX--totally different thing altogether, just thinking about size and growth rates--has collected only $36.1 million in assets since inception on 8/31/2018, uh (counting on fingers) 17 months ago.

But also by comparison, VTSAX/VTI have $897.6 billion-with-a-b. So it's over a thousand times larger than ESGV.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

nisiprius wrote: Fri Jan 31, 2020 9:23 pm
abuss368 wrote: Fri Jan 31, 2020 8:48 pm How large is the Vanguard fund?
$874 million in assets since inception in 09/18/2018, less than five months ago.

By comparison, the much-discussed WisdomTree NTSX--totally different thing altogether, just thinking about size and growth rates--has collected only $36.1 million in assets since inception on 8/31/2018, uh (counting on fingers) 17 months ago.

But also by comparison, VTSAX/VTI have $897.6 billion-with-a-b. So it's over a thousand times larger than ESGV.
Thanks. Not much.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

nisiprius wrote: Fri Jan 31, 2020 9:23 pm by comparison, VTSAX/VTI have $897.6 billion-with-a-b. So it's over a thousand times larger than ESGV.
That is simply incredible - almost $900 BILLION. Probably was over $900 BILLION before today.

This is going to be a $1 TRILLION fund.

Hard to get your head around that.
Last edited by abuss368 on Fri Jan 31, 2020 11:27 pm, edited 2 times in total.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by JonnyB »

abuss368 wrote: Fri Jan 31, 2020 8:38 pm Interesting article in The Wall Street Journal recently on how the weighting in ESG funds may be in fact higher than the weighting in Total Stock.
By mathematical definition, any fund that holds fewer stocks than than the Total Stock Market's 3500 is going to have higher weighting for each stock, assuming market cap weighting. For example, the S&P 500 has higher weighting for each stock in the fund than the Total Stock Market.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by abuss368 »

JonnyB wrote: Fri Jan 31, 2020 11:23 pm
abuss368 wrote: Fri Jan 31, 2020 8:38 pm Interesting article in The Wall Street Journal recently on how the weighting in ESG funds may be in fact higher than the weighting in Total Stock.
By mathematical definition, any fund that holds fewer stocks than than the Total Stock Market's 3500 is going to have higher weighting for each stock, assuming market cap weighting. For example, the S&P 500 has higher weighting for each stock in the fund than the Total Stock Market.
Makes sense.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by JonnyB »

Scooter57 wrote: Fri Jan 31, 2020 3:07 pm The stocks in these supposedly more socially conscious funds include quite a few companies whose ethics verge on the criminal.
The Vanguard ESG is quite explicit in what it screens for. It says so right on the tin, in the prospectus. The screening criteria are objectively easy to distinguish, for example, petroleum companies or gambling companies or military contractors.

They don't screen for subjective "ethics." What would be the criteria? Any company that has paid a government regulatory fine? Any company that has lost a class action lawsuit? Would there be a dollar minimum for consideration? Or a time limit?

They list the explicit items they screen for. If those criteria don't work for you, then you shouldn't invest in it. Everyone may have their own opinion on what constitutes the perfect screen. That doesn't necessarily mean that imperfect or incomplete screens are useless as long as what is screened is transparent.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

This type of fund was fashionable back in the 1990s, too, if anyone else remembers.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by AerialWombat »

nisiprius wrote: Fri Jan 31, 2020 8:05 pm
Let me make a quick test. I haven't tried it yet. Let's see if Vanguard explains the term on their web page for ESGV.
Product summary
  • Seeks to track the performance of the FTSE US All Cap Choice Index.
  • Market cap weighted index composed of large-, mid-, and small-capitalization stocks.
  • Screened for certain environmental, social, and corporate governance (ESG) criteria.
  • Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power.*
  • Excludes certain stocks of companies that do not meet standards of U.N. global compact principles and companies that do not meet diversity criteria.*
  • Follows a passively managed, full-replication approach.
I won’t specify which, but I would refuse to buy this fund on principle because of something it explicitly excludes.

This particular thing is something that I actively and vehemently support, and that I believe is one of the keys to solving a big, difficult problem in the world. I have the feeling most ESG funds exclude this, so if I were to implement principled investing, I would actually go find a fund that specifically includes this one thing. Such funds that hold a lot of this thing are actually a dime a dozen.

So no “ESG” funds for me, because I need to uphold my principles. Hmmm... Maybe I should go check and make sure my beloved Wellesley owns some of this one thing. :)

Edit: Yes, indeed. Wellesley owns plenty of it. Yet one more way that VWINX lets me sleep well at night. :)
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Taz »

No. My rather cynical view is that it is a bunch of vague, inconsistent feel good nonsense.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by afan »

It is pointless to refuse to own shares in companies you consider evil while continuing to consume their products.

For example, the environmental damage done by the oil industry is a consequence of people using the products, not owning the stock.

If you have a problem with oil companies, rather than abstain from their stock, stop buying oil and gasoline. Stop buying anything that was made or transported using oil-based products. Don't use internal combustion automobiles. Don't buy electricity that was produced with anything other than 100% renewable sources. Don't fly on airplanes or take trains or buses.
Walk or bike to a farm stand for your food. Ensure that the farmers who produced the food did not us oil or gas in doing so or in bringing it to the stand.

Consuming huge amounts of products of oil companies while declaring oneself too concerned about the environmental effects to own the stocks is just as damaging to the world as using the products while owning the stocks. Divesting does not remove one molecule of CO2 from the air.

So, no, active management aside, the idea of the ESG funds gets it backwards. If you care about the issues, work to cut the utilization of the products. Stock ownership is beside the point.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

afan wrote: Sun Feb 02, 2020 1:44 pm It is pointless to refuse to own shares in companies you consider evil while continuing to consume their products.

For example, the environmental damage done by the oil industry is a consequence of people using the products, not owning the stock.

If you have a problem with oil companies, rather than abstain from their stock, stop buying oil and gasoline. Stop buying anything that was made or transported using oil-based products. Don't use internal combustion automobiles. Don't buy electricity that was produced with anything other than 100% renewable sources. Don't fly on airplanes or take trains or buses.
Walk or bike to a farm stand for your food. Ensure that the farmers who produced the food did not us oil or gas in doing so or in bringing it to the stand.

Consuming huge amounts of products of oil companies while declaring oneself too concerned about the environmental effects to own the stocks is just as damaging to the world as using the products while owning the stocks. Divesting does not remove one molecule of CO2 from the air.

So, no, active management aside, the idea of the ESG funds gets it backwards. If you care about the issues, work to cut the utilization of the products. Stock ownership is beside the point.
I narrowed down my list of ESG acceptable corporations to Pets.com. I can't seem to find any current listing for this stock, though.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by MnD »

afan wrote: Sun Feb 02, 2020 1:44 pm It is pointless to refuse to own shares in companies you consider evil while continuing to consume their products.

For example, the environmental damage done by the oil industry is a consequence of people using the products, not owning the stock.

If you have a problem with oil companies, rather than abstain from their stock, stop buying oil and gasoline. Stop buying anything that was made or transported using oil-based products. Don't use internal combustion automobiles. Don't buy electricity that was produced with anything other than 100% renewable sources. Don't fly on airplanes or take trains or buses.
Walk or bike to a farm stand for your food. Ensure that the farmers who produced the food did not us oil or gas in doing so or in bringing it to the stand.

Consuming huge amounts of products of oil companies while declaring oneself too concerned about the environmental effects to own the stocks is just as damaging to the world as using the products while owning the stocks. Divesting does not remove one molecule of CO2 from the air.

So, no, active management aside, the idea of the ESG funds gets it backwards. If you care about the issues, work to cut the utilization of the products. Stock ownership is beside the point.
The last few weeks had specific news from corporate giants including MSCI, Blackrock and others about deeply incorporating ESG into their investments and indices so this topic is very relevant to BH investors. The recent introduction by Vanguard of two very broad low-cost ESG index ETF funds for US and ex-US is also a specific and relevant milestone.

What is pointless are absolutist and binary straw-man arguments on this topic. Many people who have taken significant strides to reduce their fossil fuel consumption might also prefer to not be fractional owners of fossil fuel extractive industries. Many people are in fact absolutist about things consuming tobacco and likewise would not want their investment ownership to include tobacco firms that profit from addiction, illness and death. One can significantly reduce or completely eliminate consumption of products they deem contribute to environmental, societal and ethical woes along with striving to opt out of ownership in a number of those companies through ESG screens.

Nothing is perfect or near-perfect in this space, but some of the posts reminds me of my neighbor who does not recycle despite our trash company offering it curbside, every family member drives a huge gas-guzzler, actively opposed the light rail development that opened recently serving our part of town ect. He has many one-liners as to why any effort to further promote wind, solar, recycling, mass transit, electric vehicles and other alternatives to the status quo are "pointless". My take-away is that net positive change and progress will continue like always and a segment of the population will be threatened by that.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

Amazingly, a corporation that actively assists an authoritarian regime in efforts to oppress its population somehow passes ESG screens. And therein lies my main objection to ESG funds: the screens applied by the index creators are definitely not my screens and do not match my morality. It is more satisfying to remain neutral, rather than accepting such inconsistencies.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by afan »

MnD wrote: Mon Feb 03, 2020 10:43 am [q

What is pointless are absolutist and binary straw-man arguments on this topic. Many people who have taken significant strides to reduce their fossil fuel consumption might also prefer to not be fractional owners of fossil fuel extractive industries. Many people are in fact absolutist about things consuming tobacco and likewise would not want their investment ownership to include tobacco firms that profit from addiction, illness and death. One can significantly reduce or completely eliminate consumption of products they deem contribute to environmental, societal and ethical woes along with striving to opt out of ownership in a number of those companies through ESG screens.

Nothing is perfect or near-perfect in this space, but some of the posts reminds me of my neighbor who does not recycle despite our trash company offering it curbside, every family member drives a huge gas-guzzler, actively opposed the light rail development that opened recently serving our part of town ect. He has many one-liners as to why any effort to further promote wind, solar, recycling, mass transit, electric vehicles and other alternatives to the status quo are "pointless". My take-away is that net positive change and progress will continue like always and a segment of the population will be threatened by that.
Right. The people who take steps to reduce consumption of fossil fuels and to limit any energy consumption that increases atmospheric CO2 are accomplishing something. They are accomplishing the same amount whether or not they own stock in energy companies. Refusing to own the stock does not make the air any cleaner. If this investing approach makes people feel good about themselves, then they are after something other than environmental effects. It is the same as feeling better about whatever one's level of consumption may be because one tells others how much they care about the issue. Those statements do not clear the air but can serve as virtue signalling for people who feel good about themselves when they do it.

Think about your neighbor. Do you care what he professes to think about carbon burden? Or do you only care about what he does? Remember that there are billions of people in the world, you will never know more than a tiny fraction of them. But the quality of the environment will be determined by what they do, not by what they say.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by james22 »

Swedroe: Sin Stocks Are Profitable

While socially responsible investing (SRI) and the broader category of environmental, socially responsible and governance (ESG) continue to gain in popularity, economic theory suggests the share prices of “sin” businesses will become depressed if a large enough proportion of investors choose to avoid them.

Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, thus providing investors with higher expected returns. (Some investors may view those higher expected returns as compensation for the emotional “cost” of exposure to offensive companies. However, it’s important to point out that SRI and ESG—sometimes referred to as “double-bottom-line” investing—encompass many personal beliefs, not just one set of values.)

Thus, an investment strategy that focuses on the violation of social norms has developed in the form of “vice investing” or “sin investing.” This strategy creates a portfolio of firms from industries typically screened out by SRI and ESG funds, pension funds and investment managers.

Vice investors focus primarily on the “sin triumvirate”: tobacco, alcohol and gaming (gambling) stocks. Historical evidence on the performance of these stocks supports the theory—sin stocks have provided significantly higher returns than stocks in general.


https://www.etf.com/sections/index-inve ... nopaging=1

One reason I've begun building a position in VGELX.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by donfairplay »

Get woke, go broke.

(on-topic meme because this is about money)
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

Since all this information is known, shouldn't it already be priced in? I would imagine that an "evil" company's stock would be cheaper than an "angelic" company's stock. (I won't give examples, so as not to cause a ruckus, but you all can fill in the names for yourselves.)
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