Ethical funds making clean profit

There's a growing demand for earning clean and green dollars, writes Rob Stock.

A dramatic rise in the frequency of headline-making climate emergencies, coupled with a new generation of shareholders created by KiwiSaver, will herald the uptake of ethical investing in New Zealand, Australian ethical investor Hunter Hall believes. Ethical investing is on the rise around the world, though it has yet to make much of an impact on these shores.

But David Buckland, chief executive of the listed Aussie fund manager founded in 1994 by Peter Hall, says KiwiSaver will create new ranks of fund investors and many will one day ask themselves: "Where are my savings being invested?"

If ethical investing catches on here, it would parallel its rise in Australia, where one recent paper published by the Australian sharemarket estimated about A$21.5 billion of super savings were invested ethically. That estimate may be a little high.

The Ethical Investment Association (EIA) reported there was A$11.98b in ethical funds at the end of last year, indicating the sum may be closer to 1% of total Aussie super savings, though there was a 56% increase in ethically managed funds in 2006 alone.

Not all that money may be placed for purely ethical reasons.

Matthew Mimms, of the Investment Store, the distributor for Hunter Hall in New Zealand, estimated that 90% of investors now putting their money with the firm were primarily attracted by the returns the company had produced - 15.9% a year for the past five years on the Hunter Hall Global Ethical Trust.

"First and foremost, it's the investment story, and the fact that the funds are producing great returns. There are some investors who want Hunter Hall as an ethical investment, but they are in the minority," says Mimms.

As Hunter Hall is the second largest ethical fund manager in Australia, with A$2.66b under management according to EIA research, its success swells ethical funds under management.

Uptake of ethical investing in Australia has been slow, says Buckland, though increasing awareness of climate change - something drought-plagued Australians can't ignore - was speeding the process.

But Buckland, in New Zealand last week to promote Hunter Hall's funds, believes it is unlikely to take New Zealanders 20 years to cotton on, as it had in Australia.

"New Zealanders really are a more independently minded race of people than Australians," Buckland says. That's shown by Kiwi stances on remaining nuclear-free and refusing to support the Iraq invasion.

Initially, though, KiwiSavers will have few avenues to assert their ethics through.

Currently, neither the funds of Hunter Hall, nor those of the handful of other Australian fund managers which claim ethical credentials, are being made available to KiwiSaver investors.

So far, just one ethical fund will be available, the Asteron Socially Responsible Investment Trust managed by Tyndall, a fund investing only in New Zealand and Australian shares.

There are as yet no international ethical share portfolios following the closure of the only one offered by Tower.

Asteron's Rod College says the fund, which has only $2 million invested in it and was nearly closed last year, would give Asteron a point of difference in a universe of generic KiwiSaver schemes. It was attracting companies in the charity and social good, not-for-profit sector, College said.

The unimpressive choice of ethical funds for KiwiSavers will broaden in time as the scheme matures, both Buckland and College predict, as scheme providers realise they will lose savers without offering some form of ethical choice.

Indeed, all KiwiSaver scheme providers are under pressure to take an ethical stance as Finance Minister Dr Michael Cullen warned in the Budget that, in time, each will be required to annually report on their ethical stance, even if it is to say they don't have one.

For its part, Hunter Hall would hope in time to be one of the managed fund choices KiwiSavers can make. In Australia, around half of all new fund inflows it receives are from people making government-mandated regular super savings.

The firm, which attracts $1 of Kiwi money in every $10 investors place with it, is aiming to position itself on the moral high ground, even among ethical investors, and is in the process of launching a "deep green" ethical investment fund to up the ante on rivals.

The new fund will invest only in companies which are making a positive contribution to the world such as in the development of green technology or whose activities result in social improvement.

It highlights the broad range of "shades" which Green funds come in. The Hunter Hall Global Ethical Trust (GET), for example, as investments in car-makers like Daewoo and Suzuki, which those concerned with global warming would be leery about putting their money into. The GET takes a traditional approach to ethical investing, even if it is unusual in its investment philosophies.

That traditional approach is to "negatively screen" so as not to invest in companies which are involved in socially, morally or environmentally objectionable activities such as producing pornography, weapons, cigarettes and alcohol. It's the approach the Asteron fund also takes, though its screening is done by ethical investment expert Dr Rodger Spiller.

Beyond that, Hunter Hall ceases to be conventional. It is what's termed a "value manager" - a fund manager which seeks to buy companies which have fallen out of market favour.

Such investments have included Daewoo, which Buckland says Hunter Hall bought into when its share price was so low that the value of its land was higher than the entire company.

The flagship GET fund is also able to invest anywhere, and does, without regard for the international indices which most fund managers prefer to stay close to, and as a result end up with most of their cash in the UKand Japanese markets.

Investments include Indian state banks, which are hugely undervalued compared to international peers, though more profitable, says Buckland.

- © Fairfax NZ News