/ 4 June 1999

Invest in your conscience

It may be worth losing a few percentage points growth on your investments in exchange for a peaceful night’s sleep, writes Shaun Harris

Investment decisions should be amoral, shouldn’t they? In a perfect world, perhaps. But suspending moral judgment is not easy in modern society where the profit motive is still widely regarded with suspicion and some companies engage in nefarious activities like dumping chemical waste into the sea or testing the limits of the Usury Act when charging interest to clients.

Even the seemingly sensible practice of constructing risk profiles or benchmarking a fund’s performance entails a moral decision.

How much risk should a fund manager take with client’s money, or by being ultra- conservative, are returns being over- compromised?

Some portfolio managers truly do seem to adopt a ruthless attitude towards investing. Take Lance Coogan, manager of Fedsure’s Pioneer Fund, the most aggressive in its suite of unit trusts.

Coogan, who also heads up Viking Asset Management, uses every (legal) trick in the book to pursue the highest possible returns for his clients.

No sissy benchmarking for him – he only chases absolute returns, a strategy that had his fund at the top of the specific equity class until recently.

At the other extreme, though, are the conscience or ethical funds, theme unit trusts with portfolios constructed to comply with religious beliefs or moral values.

There are not too many of these in the South African market yet, but conscience funds are bound to multiply like their counterparts in the United States and the United Kingdom.

The explosion of ethical funds in the US prompted John Rothchild to write in Fortune magazine in 1996 – “socially conscious investing … is one of those ideas that’s silly at first blush and ridiculous on closer inspection”.

We wouldn’t want to be as harsh as that, but it’s probably only a matter of time before we have a Land Rights for Gay Whales Fund, or an ethical fund of funds in South Africa.

In a way, the black chip or empowerment funds, popular until they got nailed by Nthato Motlana and Jonty Sandler, are moral funds.

Investors are possibly placing support for a cause ahead of returns when they invest in these unit trusts, but some have performed extremely well.

Values aside, there are some sound black chip companies around and the unit trusts are generally run by solid asset managers.

The Community Growth Fund makes its own, sometimes peculiar, moral decisions about which companies’ shares to invest in, based on factors like trade union relations and affirmative action policies – something that should see a large part of its portfolio cleared out when racial quotas soon come into force and corporate South Africa is found lacking.

But the really interesting unit trusts – and possibly the only ones that can be regarded as pure ethical funds at this stage – are the Oasis Crescent Fund and Southern Pure Specialist Fund.

The first obvious contradiction that management never seems to comment on is that while both funds unambiguously state their dislike of insurance and financial services shares, both are run under the auspices of insurance companies – Fedsure and Southern Life respectively.

Then there is an important difference between the funds, that helps explain why Oasis Crescent is really smoking with a ranking of sixth out of 26 funds over three months and second over six months, while Southern Pure lags around the middle of the table.

Oasis Crescent includes tobacco company shares in its portfolio (but excludes liquor, pork, pornography and gambling), while Southern Pure is a strict non-smoker.

So the inclusion of tobacco company British American Tobacco South Africa, one of the better performers, in Oasis’s portfolio helped returns and left Southern Pure wheezing behind.

Of course, the purists might argue that smoking is gambling with one’s life and should therefore be excluded under the no- gambling mandate, or that companies like CTP and Penrose should be left out because they are major media for advertising tobacco and alcohol. Media shares can probably be staged now that Stag magazine is no longer around.

The point is, however, that the inclusion of a few sin shares in the portfolio can make a vast difference to performance.

Oasis Crescent has been reported to be considering the Rembrandt Group as an investment. Can this be so, when Rembrandt is a substantial shareholder in liquor groups W&A Gilbey and Stellenbosch Farmers’ Winery, as well as financial services groups Sage and Absa?

Oasis Crescent fund manager Adam Ebrahim does not see a contradiction in being included under Fedsure’s range of unit trusts, saying it’s a “convenient arrangement” in order to get a unit trust licence.

Regarding its top-performing tobacco share, he says that nowhere in Islamic literature or ruling is tobacco “excluded per se”. But Rembrandt would fall foul of Oasis’s mandate, he says, because while up to 10% of income from non-permissible sources is allowed, the company derives more than this from its liquor and financial services holdings. So Oasis won’t be investing in Rembrandt.

So for the time being, Southern Pure investors are receiving relatively poorer returns, but perhaps with a better conscience.

It might be worth sacrificing a few percentage points growth on your money for a peaceful night’s sleep.

As John Lennon sang: “Whatever gets you through the night, it’s alright, it’s alright.”