Morphic’s Head of Research James Tayler goes through five important questions you need to ask your ethical fund manager.
That is a document where investors can see whether the investment process and philosophy are aligned with their values.
It’s worth explaining the difference between ethical investing and responsible investing:
If your values suggest that you don’t want to be invested in mining companies or oil and gas companies because of your concern about the environment, you want to make sure that your money is not invested in those companies.
How can you be sure? You need to ask your fund manager to fully disclose the companies within that portfolio. And by fully disclosed, I mean not just the top five or top ten, you should require the full portfolio. If it is not disclosed, you should wonder what has that fund manager got to hide if they are only telling you their top ten holdings?
Why is that important? Shareholders typically get an annual opportunity to vote on important matters regarding that company, be it matters of governance or strategy. Those votes actually belong to the clients of the fund, the unitholders, they don’t belong to the manager. So it’s the manager’s fiduciary responsibility to vote appropriately and a part of that duty is also the transparency around that voting. I would expect the fund manager to publish on an annual basis its voting records and particularly point out where the fund has voted against management’s recommendation to provide visibility, transparency on that and also explanations as to why they voted against the management.
In the same way that we choose a chartered accountant or a certified builder, membership of a relevant body gives an extra level of security, an extra layer of assurance that the investment product is actually good to label and that the way it is managed is aligned with what you were preached.
Two relevant examples of industry bodies would be:
Some investments will typically be a grey area and a dedicated independent committee should be able to veto that investment if they deem it is outside of the Responsible Fund’s mandate.
Why is that important? Let us give the example of Woolworths, an Australian company: it is predominantly a retailer but up until recently, it also has alcohol distribution business, Dan Murphy’s, and it has a stake in a hotel and gambling company. Now, these are relatively small parts of the business, but they certainly don’t match certain investors’ values. Hence an independent committee or board can make the decision around a grey area, regardless of other financial considerations.
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