Are socially responsible funds just another marketing ploy?

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vu8
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Are socially responsible funds just another marketing ploy?

Post by vu8 » Mon Jul 23, 2018 3:41 pm

They have LGBT friendly funds, AI robot fund, and Socially responsible ETF. Do they add any value to the mArket?

MotoTrojan
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Re: Are socially responsible funds just another marketing ploy?

Post by MotoTrojan » Mon Jul 23, 2018 3:45 pm

vu8 wrote:
Mon Jul 23, 2018 3:41 pm
They have LGBT friendly funds, AI robot fund, and Socially responsible ETF. Do they add any value to the mArket?
They add exactly what they state, an ability to buy a "diversified" fund that either focuses on a specific market (AI/Robot) or excludes certain companies that don't meet a requirement.

I find it interesting that you added the AI Robot fund example because that is pretty similar in my view to the S&P's Healthcare, Tech, etc... type categories, just more specific. That one would likely be chosen by someone that feels that industry will outperform expectations and would be for a desired increased return. The other examples would fit more into a social desire to not fund what are seen as morally bad companies, but not necessarily with the expectation of increased returns.

Not for me but I am sure there is a market for it.

MnD
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Re: Are socially responsible funds just another marketing ploy?

Post by MnD » Mon Jul 23, 2018 4:15 pm

Absent socially responsible funds, some people would not invest in equities at all or might pick a small handful of individual company stocks they felt met socially responsible criteria.

The Vanguard offering in this category has slightly outperformed the S&P 500 for the past 10 years so it doesn't seem to be subtracting any value for those that invest in it.
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FireProof
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Re: Are socially responsible funds just another marketing ploy?

Post by FireProof » Mon Jul 23, 2018 4:23 pm

Of course, but doesn't mean it doesn't work. My wife wouldn't invest otherwise, so all her (minor investments) are in ESG funds. I carefully omit mentioning how minor their social commitment actually is, so she can feel good imagining her money is hard at work educating orphans, saving whales, and kicking greedy bankers in the balls. In the end, it's a minor foible - expense ratios are very close, and obviously performance essentially identical.

Dantes
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Re: Are socially responsible funds just another marketing ploy?

Post by Dantes » Mon Jul 23, 2018 4:31 pm

Its not clear to me what you mean by "add any value to the market". But If I could educate orphans, save whales, and kick greedy bankers (without undue effort) I would. Its like a vote, or purchasing a hybrid ten years ago; it might now, on its own, be an insignificant action, but if it reaches a critical mass it does have potential to drive change.

Scooter57
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Re: Are socially responsible funds just another marketing ploy?

Post by Scooter57 » Mon Jul 23, 2018 5:01 pm

When I saw pharmaceutical companies notorious for selling products they know harm and kill people listed as "socially responsible" just because they recycle their garbage I decdied the whole concept is, indeed, a scam.

ThrustVectoring
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Re: Are socially responsible funds just another marketing ploy?

Post by ThrustVectoring » Mon Jul 23, 2018 5:21 pm

Socially responsible funds face a pretty awful dilemma.

On the one hand, they could work. The only way refusing to invest in "bad" companies could work, though, is by increasing their cost of capital. By refusing to lend or buy shares from a company, it increases the price they must pay to fund new expansion. Since the company gets a worse price, investors who can hold their nose get a better one - socially responsible funds have found a way to systematically invest in underperforming companies. If you want to spend money to make the world a better place, charitable donations almost certainly have a better bang for your buck.

On the other hand, they could do nothing to the overall cost of capital for the companies they refuse to invest in. In which case, they do little other than help you feel good about your investments while charging a higher management fee. At that point, why bother?
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permport
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Re: Are socially responsible funds just another marketing ploy?

Post by permport » Mon Jul 23, 2018 5:34 pm

Yes.

I take a look at the companies in some of these indexes and think "Really??!!" -- you consider them to be socially responsible?

Maybe the companies in the indexes are chosen as the lesser of all the evils, but to me the distinction is meaningless.
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Portfolio7
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Re: Are socially responsible funds just another marketing ploy?

Post by Portfolio7 » Mon Jul 23, 2018 6:03 pm

FireProof wrote:
Mon Jul 23, 2018 4:23 pm
Of course, but doesn't mean it doesn't work. My wife wouldn't invest otherwise, so all her (minor investments) are in ESG funds. I carefully omit mentioning how minor their social commitment actually is, so she can feel good imagining her money is hard at work educating orphans, saving whales, and kicking greedy bankers in the balls. In the end, it's a minor foible - expense ratios are very close, and obviously performance essentially identical.
I admit to being in a similar boat. We have a few percent in the Vanguard ESG fund replacing some large cap so I can tell my wife that yes, it's part of our diversified portfolio. Given that it's done pretty well over time, I don't see the harm in it, and maybe it does a little good. I see it as more of a gesture than any meaningful step - even if ESG became the primary mode of investing for the majority of investors, I have no idea whether in the end any social good would actually come of it; it seems to me there are too many variables to make any kind of reliable statement of long term societal benefit, and it would be interesting to know if anyone really ever attempted this. Tbh, I think of ESG more as 'virtue signaling' than anything else, but would be open to evidence to the contrary.
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Mike Scott
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Re: Are socially responsible funds just another marketing ploy?

Post by Mike Scott » Mon Jul 23, 2018 6:06 pm

There may be some that are earnestly trying. However, given the complications of defining / targeting what socially responsible means to different people etc etc... it comes off as a marketing ploy. Scam may or may not be too harsh.

One of the finance writers I follow suggests that given the complexity of genuine socially responsible investing, you invest in broad market index funds and use the returns to support your personal causes through donations.

There is also a concept that buying shares in "bad" companies to get voting privileges is a powerful approach to advocacy.

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JoeRetire
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Re: Are socially responsible funds just another marketing ploy?

Post by JoeRetire » Mon Jul 23, 2018 8:12 pm

vu8 wrote:
Mon Jul 23, 2018 3:41 pm
They have LGBT friendly funds, AI robot fund, and Socially responsible ETF. Do they add any value to the mArket?
Depends what you mean by "value to the market".

Since some folks wish to invest in companies that support a certain social point of view and might be willing to give up some return to do so, the market is happy to respond with products that meet those wishes.
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Re: Are socially responsible funds just another marketing ploy?

Post by triceratop » Mon Jul 23, 2018 8:39 pm

ThrustVectoring wrote:
Mon Jul 23, 2018 5:21 pm
Socially responsible funds face a pretty awful dilemma.

On the one hand, they could work. The only way refusing to invest in "bad" companies could work, though, is by increasing their cost of capital. By refusing to lend or buy shares from a company, it increases the price they must pay to fund new expansion. Since the company gets a worse price, investors who can hold their nose get a better one - socially responsible funds have found a way to systematically invest in underperforming companies. If you want to spend money to make the world a better place, charitable donations almost certainly have a better bang for your buck.

On the other hand, they could do nothing to the overall cost of capital for the companies they refuse to invest in. In which case, they do little other than help you feel good about your investments while charging a higher management fee. At that point, why bother?
For further reading along these lines, see Cliff Asness' paper: Virtue is its Own Reward: Or, One Man’s Ceiling is Another Man’s Floor
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Re: Are socially responsible funds just another marketing ploy?

Post by Jack FFR1846 » Mon Jul 23, 2018 9:02 pm

I think of it this way. When I buy a stock, I'm buying it from someone, not from the company. So the benefit of my money is going to the last holder of the stock. Perhaps I want to buy Fluffy Bunny, and Prescriptions should be Free (FBPF) and so I put my money up. As it turns out, all of the shares I buy were owned by Martin Shkreli. Well, that didn't go as I had planned.
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Re: Are socially responsible funds just another marketing ploy?

Post by HEDGEFUNDIE » Mon Jul 23, 2018 9:55 pm

There was a thread on this just a few weeks back.

The clearest way in which socially responsible funds *are not* just a ploy is from the perspective of the investor, not the company. If as an investor you don’t want your income generated from “bad” companies, that is totally legitimate, in the same way that you may not want to work for a tobacco company, gunmaker, etc.

It’s about being able to look yourself in the mirror / sleep well at night.

wootwoot
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Re: Are socially responsible funds just another marketing ploy?

Post by wootwoot » Mon Jul 23, 2018 9:57 pm

These types of funds are more of a "feel good" fund. If you're looking for sector exposure there are tons of ETFs out there that just aren't being actively marketed.

If you need a fund to "feel good" then you're likely investing for the wrong reason and will move your investment around if you ever don't "feel good" about it. One of the major boglehead tenants is to avoid emotional investing, these types of funds prey on it.

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Re: Are socially responsible funds just another marketing ploy?

Post by whodidntante » Mon Jul 23, 2018 10:12 pm

I don't think ESG and variations of that idea are a source of risk and return, if that is what you are asking. It's an expression of certain values. Investing in exponential technologies might be a source of risk and return. We'll see. Exponential technologies will change a lot of things, so maybe you don't need to specific invest in those companies for it to matter.

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Re: Are socially responsible funds just another marketing ploy?

Post by jminv » Tue Jul 24, 2018 4:17 am

The reason they are offered is because they are 'valued' by a segment of the investing public. These offerings make certain people feel better about themselves and in the process, it drives/retains business to the funds offering these. It also creates value for the funds since they can charge higher ERs for the product than they could for a broad market fund.

It's also difficult to define what a socially responsible fund's selection process should be. Since most people have differing social/ethical views, even within the subsets demanding these products, a fund could not satisfy every individual if they looked closely at who the funds actually invested in. I think this is another reason for the trend of further segmentation in this market. Enough 'personalization' will also help the fund further justify a higher ER and drive loyalty to the product, since the investor identifies closely with it.

I think that there are perfectly legitimate reasons an investor might want to avoid certain companies due to social/ethical concerns and sometimes the presence of these issues could be risk factors in the business. That these concerns are risks is one factor proponents of socially responsible funds use to make a case for the business side of choosing them ie avoid risk and make more return. In many cases, though, those risk factors might be a source of returns since there is a correlation between risk and return. Therefore, it's important for the firms that create these funds to not be so narrow in their selection process as to exclude so many companies that the fund underperforms the market by a substantial margin. Significant, sustained underperformance would dampen demand for the products since this would create holes in one argument advanced for social funds. You see that in most funds there are companies that many people could argue are not socially responsible but yet they are still there and this is why.

I think that these funds do drive some broader behavior in the market. Norway's sovereign wealth/oil fund, for example, uses social investing as do some other pension funds to differing degrees. It does seem to change behavior on the margins, at least to avoid bad publicity. Companies don't want to end up on the list of Norway's oil funds excluded companies and since there are very few companies on this list, it does get business press attention whenever it happens. There have been instances of companies actively seeking to get off this list and onto the list of reinstated companies. They also actively engage companies on issues they care about, which probably has some impact. I don't think this translates into increased returns, though, but broader issues that the fund's investors, on average, care about.

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Re: Are socially responsible funds just another marketing ploy?

Post by SuperGrafx » Tue Jul 24, 2018 11:12 am

They're a marketing ploy.

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Re: Are socially responsible funds just another marketing ploy?

Post by lukestuckenhymer » Tue Jul 24, 2018 11:29 am

permport wrote:
Mon Jul 23, 2018 5:34 pm
Yes.

I take a look at the companies in some of these indexes and think "Really??!!" -- you consider them to be socially responsible?

Maybe the companies in the indexes are chosen as the lesser of all the evils, but to me the distinction is meaningless.
https://finance.yahoo.com/quote/NBSRX/holdings/
The inclusion of Comcast, one of the worst oligopolistic offenders in the US and one of the prime enemies of Net Neutrality surprised me.

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Re: Are socially responsible funds just another marketing ploy?

Post by nedsaid » Tue Jul 24, 2018 12:56 pm

Larry Swedroe suggested that there might be a "sin" premium and also that there might be a "corruption" premium. It seems that the corruption premium shows up in Emerging Markets. Indeed, there is a Vice Fund out there, my recollection is that the fund has a good performance record. The good book says that sin is pleasurable for a season, it might also be profitable.
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Re: Are socially responsible funds just another marketing ploy?

Post by BradJ » Tue Jul 24, 2018 1:19 pm

"It's all relative" about sums it up.

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camillus
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Re: Are socially responsible funds just another marketing ploy?

Post by camillus » Tue Jul 24, 2018 1:42 pm

triceratop wrote:
Mon Jul 23, 2018 8:39 pm
For further reading along these lines, see Cliff Asness' paper: Virtue is its Own Reward: Or, One Man’s Ceiling is Another Man’s Floor
Thank you for the link to the article, where it is said plainly: "Pursuing virtue should hurt expected returns." :happy

There is a great deal of cynicism in the world.

Interestingly in my wife's TIAA 403b, at an R1 institution (high expense ratios, around 0.70% ERs), the ESG fund carries no higher premium - that is, the expense ratio is just as high as any other fund offered in that account. ESG investing in that account is "free" in the marginal sense. That's what we do!

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Re: Are socially responsible funds just another marketing ploy?

Post by retiringwhen » Tue Jul 24, 2018 3:38 pm

lukestuckenhymer wrote:
Tue Jul 24, 2018 11:29 am
permport wrote:
Mon Jul 23, 2018 5:34 pm
Yes.

I take a look at the companies in some of these indexes and think "Really??!!" -- you consider them to be socially responsible?

Maybe the companies in the indexes are chosen as the lesser of all the evils, but to me the distinction is meaningless.
https://finance.yahoo.com/quote/NBSRX/holdings/
The inclusion of Comcast, one of the worst oligopolistic offenders in the US and one of the prime enemies of Net Neutrality surprised me.
Just goes to show that one man's sinner is another man's saint.

As mentioned above, almost no two people have the same value-system and that is a core issue here. It may be more correct to describe them as funds that hew to a specific segment of investors that value specific characteristics in their investments.

If one is serious about social-responsible investing based upon personal values, it may actually be the only case that I can make for individual stock picking. In fact, at the very margins, I own token amounts of several small companies that I believe provide something valuable from my value system's perspective and they are beleaguered and not respected for inclusion in many index funds and especially ESG funds. (I am a 93% 3-funder overall)

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Re: Are socially responsible funds just another marketing ploy?

Post by Phronesis » Tue Jul 24, 2018 3:51 pm

A marginally relevant tidbit... Just this morning NPR ran a segment (discussed in full on the podcast _Hidden Brain_) regarding recent research that shows individual indiscretions by CEOs had a negative effect on the stock of their companies, sometimes in the range of double digit percentages. So, the market does punish some behaviors, as analysts modify their pricing based on such things, apparently. How much or sufficiently is another question.

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permport
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Re: Are socially responsible funds just another marketing ploy?

Post by permport » Tue Jul 24, 2018 4:30 pm

lukestuckenhymer wrote:
Tue Jul 24, 2018 11:29 am
permport wrote:
Mon Jul 23, 2018 5:34 pm
Yes.

I take a look at the companies in some of these indexes and think "Really??!!" -- you consider them to be socially responsible?

Maybe the companies in the indexes are chosen as the lesser of all the evils, but to me the distinction is meaningless.
https://finance.yahoo.com/quote/NBSRX/holdings/
The inclusion of Comcast, one of the worst oligopolistic offenders in the US and one of the prime enemies of Net Neutrality surprised me.
I could hardly have chosen a better example myself! :beer :shock:
Buy right and hold tight.

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oneleaf
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Re: Are socially responsible funds just another marketing ploy?

Post by oneleaf » Wed Jul 25, 2018 12:15 pm

Nowadays, you can do ESG ETF's with very little premium over non-ESG ETF's. For instance, iShares suite of new products (ESGU, ESGD, ESGE, and ESGL) cover US, Developed ex-US, Emerging, and US Small at reasonable expenses at 0.15%, 0.20%, 0.25%, and 0.17% respectively.

Vanguard has a couple new ones coming out that will essentially be ESG versions of VTI (US Total) and VXUS (Total International), and will be very reasonably priced.

I would normally be onboard with these products, until I examine the portfolio more closely. Inevitably, I will be surprised at what is included. Sometimes, a company I view as "bad" will even be a HIGHER weight in the ESG fund than it would be in a comparable non-ESG fund. My interest in ESG funds have come and gone several times over the past decade, and with the renewed interest in low-cost ESG ETF's, my interest has been piqued again, but the portfolio weightings always makes me pass on these products.

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