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

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

Post by nisiprius »

Does "vice" outperform? The most famous mutual fund to try to put this into action, VICEX (blue), has--as is so often the case--engaged in leapfrog with the total market. The leaps have, as is so often the case, lasted long enough to let you get any desired result by choosing your time period. But since inception it has, to date, failed to outperform the total market (orange).

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

Post by Rick Ferri »

Do any of you tilt your portfolio to ESG for some alpha? Or is it purely an ethical decision?
The theory that ESG produces alpha has not been vetted in academics. ESG companies tend to be tech, which is growth bias. Strip that out and you lose the alpha headline, plus ESG is destined to underperform in a value market. That being said, ESG is a personal choice, like putting solar panels on your roof. You pay money and feel good, and that has value, but it is inconclusive that any financial benefit in the form of alpha will come to you in the long-term.

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

Post by WhyNotUs »

afan wrote: Sun Feb 02, 2020 1:44 pm 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.
If one was pursuing the consistency that you promote, then they would neither use the product nor own the stock.

It is easier to be consistent if one acts solely on their individual or subgroup self-interest. Any altruistic activity increases the challenges to avoiding calls of hypocrisy.

SRI waned after the take-down of tech stocks post-2000.
I own the next hot stock- VTSAX
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by TeeDee »

Is it considered political to say that ESG is political?
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firebirdparts
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by firebirdparts »

Yeah, pretty much.

I do however think it's totally crazy to say that you are "supporting" these companies by owning them. That's totally wrong. Stockholders don't help out much around the office.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by MnD »

After reading recent statements by the leaders of Blackrock, MSCI, JP Morgan Chase and other giants of business on ESG plans going forward I'm pretty amazed at how fast this is getting mainstreamed into core business and investment practices and the role and responsibilities of corporations. A few years ago I might have been throwing out pithy one-liners about ESG. I'm increasingly viewing it as continued evolution of best business and investment practices to enhance long-term returns.
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fortyofforty
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by fortyofforty »

I suspect the performance of ESG funds will be mostly a function of growth over value, or tech over old industry, rather than a reward for being environmentally and socially conscious.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by nisiprius »

firebirdparts wrote: Thu Feb 06, 2020 12:39 pm Yeah, pretty much.

I do however think it's totally crazy to say that you are "supporting" these companies by owning them. That's totally wrong. Stockholders don't help out much around the office.
The executives who are compensated with stock care deeply about the stock price. And the existence of a secondary market is an important factor in the issuance of stock in the first place. You are not fully decoupled from the company just because you didn't buy the stock at an IPO.
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langlands
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by langlands »

I can't think of any reason based in economic theory why ESG funds should outperform. On the other hand, there is a good reason why they might underperform, which is outlined in this article by Matt Levine: https://www.bloomberg.com/opinion/artic ... -the-bonds. He applies the logic to bonds, but the principle is the same: ESG investors should accept a lower financial return in exchange for being a virtuous person. There is no free lunch. Since the ESG investor expects ESG companies to not only maximize shareholder profits, but also take into consideration the environment, social well-being etc., some of his investment will be going to those other causes and not coming back to him (well it will indirectly, through a better environment, planet etc., but not directly to his bank account). In reality, the drag is probably negligible and any underperformance/outperformance is most likely due to conventional factor tilts such as growth as mentioned by other posters.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by senex »

Some good commentary here.

I personally am dubious about both the "morality" and the "performance" claims of ESG.

On morality, I consider that morality is not formulaic. When I dig past the platitudes and look into the actual stocks being held, I find companies that run sweatshops, that fire employees for religious/political beliefs, that consume profligate amounts of energy or raw materials, that promote immorality, that promote conspicuous consumption, that discriminate, that censor, that pollute, etc. I find producers of "bad stuff" are banned while consumers of "bad stuff" are overweighted (this is particularly true with energy). I have been unable to determine, with any reasonable effort, whether a given ESG fund is actually more "moral" than a broad index.

As for performance, I expect that picking stocks and paying elevated expense ratios is a recipe for long-term underperformance. Even if ESG criteria provide competitive advantage (a dubious claim), that advantage is already factored into the stock prices.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by ksualum »

Nsiprius,
A lot of the ESG funds you mentioned were around 1% ER. I have DFSIX and DFSPX in my 401k. For a while I thought I was saving the world with my 401k, but I have since just gone to ITOT and IXUS because I did not think it was worth the extra expense ratio.
Some really good thoughts on this topic posted previously.

I am amazed how much DFSIX and DFSPX have outperformed ITOT and IXUS. It is probably just due to oil being down and tech being up.

Does anyone have any thoughts on DFSIX and DFSPX? ER is only 0.25% and 0.37% respectively (I realize this is way more than .03 and 0.09 for the other 2). These two just seem better than the 1% ER of the others and I know there are a lot of Dimensional Fund fans out there . . .
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Anon9001 »

nisiprius wrote: Thu Feb 06, 2020 8:57 am Does "vice" outperform? The most famous mutual fund to try to put this into action, VICEX (blue), has--as is so often the case--engaged in leapfrog with the total market. The leaps have, as is so often the case, lasted long enough to let you get any desired result by choosing your time period. But since inception it has, to date, failed to outperform the total market (orange).

Source

Image
This is a unfair comparison considering VICEX is a Global Fund with 44% in Ex-US stocks compared to 100% exposure to US stocks in VTSMX. Here is comparison of it with VT:https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Puretaxableindexer
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Puretaxableindexer »

My main problem with ESG is it isn't really defined which allows for jumping on the tech stocks that have led the way, and I want companies that make money like defense, energy, etc... I'll stick to making dirty money.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Housedoc »

No ESG for me, dig deep into many of these groups and you can find a dark side hidden within.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by Barry Barnitz »

Hi:

While the investment merits of ESG investing are arguably personal and debatable, the recent empirical data regarding net ESG investment in the marketplace may be of interest to you. According to a recent report, 33% of total U.S.-domiciled assets under management (AUM) now use sustainable investing strategies.

Debbie Carson, March 26, 2021, ESG A Growing Phenomenon.
Environmental, social and governance investing has been popular with institutions and certain niche investors for years, but interest in ESG investing has ballooned beyond those groups.
US SIF, an organization that has tracked socially responsible investing since 1995, reported in November that 33% of total U.S.-domiciled assets under management (AUM) now use sustainable investing strategies.
ESG is finding its way into fixed income, too. Sustainable-debt issuance—including green and social bonds—reached a record $530 billion in 2020, according to Environmental Finance, up 63% from 2019.
...there is no ESG-investing definition, and no uniform U.S. or global standards on what or how companies disclose information. That can make it confusing for investors wanting to pick funds. ...To bring more clarity to investment funds, Chris Fidler, senior director of product management at the CFA Institute, says the organization is creating voluntary ESG disclosure standards for investment products. The CFA Institute expects to release a draft of the standards in May. Fidler explains that the organization seeks to bring uniform transparency to a product’s ESG-related objectives, constraints, policies and methodologies.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by secondopinion »

JacobTeach wrote: Fri Jan 31, 2020 6:40 am 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?
Buying ESG funds is like letting someone else pick your ethics; sometimes, the companies included are more corrupt than the companies they exclude. As a result, I do my own selection.

Never will use ESG. If an ethical company is dropped (and loses value) because of some ridiculous clause that ESG happens to add later on, then there is a bargain company.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by OnTrack »

I would not want to earn money by selling illegal drugs even if I thought I could get away with it because those drugs are harmful to individuals and also to society as a whole. Similarly, I think it is reasonable to not want to profit from part ownership in companies that sell legal products that are harmful to individuals and to society such as tobacco products. That being said, I currently don't own any ESG funds.
Last edited by OnTrack on Mon Mar 29, 2021 11:36 pm, edited 1 time in total.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by clip651 »

langlands wrote: Thu Feb 06, 2020 8:31 pm Since the ESG investor expects ESG companies to not only maximize shareholder profits, but also take into consideration the environment, social well-being etc., some of his investment will be going to those other causes and not coming back to him (well it will indirectly, through a better environment, planet etc., but not directly to his bank account). In reality, the drag ...
If (big if) that happens, and the ESG investor gets somewhat lower profit while seeing other indirect benefits to the world, some would consider that a feature, not a bug.

I'm not under the impression that ESG investors in general expect to outperform. I think many are hoping to do some good while investing, in some way or another, while getting returns good enough for their goals. There are low expense ratio ESG funds now, so at least the ER won't eat into their returns much.

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

Post by hi_there »

Puretaxableindexer wrote: Tue Feb 25, 2020 5:42 pm My main problem with ESG is it isn't really defined which allows for jumping on the tech stocks that have led the way, and I want companies that make money like defense, energy, etc... I'll stick to making dirty money.
I think it's also that companies that make a lot of money become "ESG", because they can use profits to buy carbon credits or whatever.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by OnTrack »

I would be interested to know how ESG funds vote their proxies. Do they actively vote differently from management's recommendations in some cases?
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by a_rotator »

I invest in ESG funds almost exclusively, with the exception of my small value tilt. (If I could find a good, competitively priced ESG value fund I would be all over it.) As someone who takes ethics seriously and teaches environmental ethics, it's important to me that I exclude certain companies from my portfolio. That said, I'd be the first to tell you that ESG Investing is problematic in it's current state, for many of the reasons critics mention here, especially issues pertaining to consistency and transparency in methodology. I am even sympathetic to the criticism that in it's current state ESG is little more than a marketing ploy. Yet, I still invest in ESG because I'm not a morally perfect human being (nor do I tell others they should or must be), and I think doing more good is better than doing less, and I do think investing in ESG satisfies that more modest goal. I do see a case to be made that ESG will outperform the market moving forward, but that is about fourth on my list of reasons.
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Re: ESG outperforming - will you add any ESG funds to your portfolio?

Post by chumpchange »

a_rotator wrote: Tue Mar 30, 2021 12:25 am As someone who takes ethics seriously and teaches environmental ethics, it's important to me that I exclude certain companies from my portfolio.
Thanks for sharing this a_rotator. This is my take as well. I like the idea of index funds, but I want to avoid investing in fossil fuel companies, nuclear weapon manufacturers, private prison companies. This is important to me ethically. I think ESG index funds at least are a good step in that direction, in that they are intended to exclude the worst offenders. In their short life, they seem to perform about the same and cost about the same as regular index finds.

Unfortunately, this seem to be an area filled with misinformation and cynicism. First we have the Bogleheads philosophy which, by design, seriously prefers simple, index funds over anything managed and are skeptical about ESGs for valid reasons. On the other hand, we tend to have environmentalists and the political-left who tend to not have a very good understanding of investing and the markets and online conversations tend to devolve quickly. The Venn Diagram of Bogleheads who want ESGs would be interesting to see.
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