And it's... Mediocrity for the win!!
I am going to jump right over the active vs. passive investment debate in this article. I believe that passive investments have a proven track record of outperformance over actively managed investments.
This article is about how socially responsible investments have fared compared to “traditional” investments.
When we think of winning, what do you think about? Tom Brady’s impressive six super bowl rings? Or another New England Patriot making the league minimum who also won a super bowl ring??
Not often do we associate mediocrity with winning.
I’m not saying that any professional athlete is mediocre. What I am saying is that you don’t have to be the star to be a winner.
Studies have shown that passive investments tend to outperform most actively managed investments over time net of expenses.1 More often than not, the stock market in general outperforms the various active fund managers who are trying to buy and sell stocks in order to outperform the index.
In this case, mediocrity wins. The “boring” index funds tend to outperform the “more sexy” actively managed funds.
So how does this relate to socially responsible investing?
The historic story about socially responsible investing is that they tended to under perform a traditional investment because of the stock exclusions. As in, instead of investing in the 500 stocks in the S&P 500 index, you would “obviously” have lower performance if you excluded some of these stocks due to socially responsible exclusion criteria.
Well… The best lies are partially wrapped in the truth.
87% of millennials consider a company’s social, political or environmental impact when investing2 so it is incredibly important that we start to dispel some of these myths and half truths.
The half truth is that exclusion based socially responsible investing has proven to underperform traditional investments.
CNBC Reviewed years of Morningstar data and found that “funds designed to exclude stocks, such as “sin” sectors - no tobacco, alcohol and guns - don’t tend to measure up” according to Jon Hale, head of sustainability research at Morningstar. He further stated that “academic research has shown that stock exclusion tends to be a negative factor in performance.”3
This same CNBC report stated that “on the performance of socially responsible funds versus traditional funds and benchmarks found that there is no significant performance drag.” “Companies that score highly on ESG metris (environmental, social and governance) show performance that is consistent with traditional benchmarks.”
In other words, if you use a socially responsible investment that is based on stock exclusions, you are more likely to underperform a traditional investment compared to a socially responsible investment that seeks out good, highly rated companies based on ESG Data.
A comprehensive study of socially responsible investments4 found that 15 of 35 studies showed that SRI funds had the same performance as traditional funds. 14 of those 35 showed outperformance and only 6 of the 35 showed underperformance.
Let’s just take the mid range consensus in these studies.
Studies seem to show that socially responsible investments have THE SAME PERFORMANCE long term as a traditional investment.
And it’s mediocrity for the win!!!!!!!!!
On a serious note… I am poking a bit of fun at “mediocrity.” The point is, socially responsible investing has had the stigma of underperformance, just like passive investments had in the past. Passive investments have had massive inflows recently because the old stigmas of underperformance have faded. Investors and planners have increasingly realized the true value in passive investing.
Socially responsible investing will (I believe) follow this same trend. I believe we now have enough research showing no significant underperformance compared to a traditional investment is a win.
If those studies factored the many other positive benefits of socially responsible investing, I believe we would see more and more people embracing socially responsible investing.
This article was intended to be short. If you would like to dig into socially responsible investments further, I suggest you download my short e-book. It explains socially responsible investments in more depth as well as our unique business model that incorporates socially responsible investments, lower than average fees and a 20% donation business model.
Access the report at www.ustrust.com/articles/insights-on-wealth-and-worth-2018.html
Constance Guestke, CNBC (2017) The Truth if finally starting to emerge about socially responsible investing.