June 2014 Newsletter

June 2014 Newsletter

News & Commentaries by Ron Robins


Saintly stocks turning the tables on the Sinners. “For the second year running, however, the Saints have gained ground, and they remain well ahead of the Sinners over one, three and five years, although the Sinners retain the upper hand over the past decade. But that long-term advantage may not last much longer.”

[COMMENTARY] The reason for the last comment is that banks make-up a large proportion of this ’saints’ index–as they do in many ethical portfolios–and the banks underperformance over the past ten-years is about to change for the better. However, I question that premise. Firstly, accounting rule changes a few years ago allowed the banks to hide immense losses, which just might have to be addressed at some point. Secondly, most major banks mammoth and growing derivatives exposure pose enormous risks as ’financial weapons of mass destruction’ (quoting Warren Buffett) should we have another financial crisis. Thus, I have substantial concerns about bank stocks performing well until these problems are dealt with. Nonetheless, as I’ve written about many times, I do believe that ’saintly’ or ethical portfolios will outperform ’sinner’ portfolios over the long-term.
Saintly stocks turning the tables on the Sinners, by Heather Connon, June 13, 2014, Interactive Investor, UK.

British Islamic bond debut becomes a market hit. “Britain has become the first western country to sell a five-year Islamic bond or ’sukuk’. The $340 million offering drew in orders of $3.9 billion which was more than ten times oversubscribed… ’Demand for high credit quality sukuk in the triple-A and double-A space far exceeds supply, particularly among the fast growing Islamic banks who need an increasing amount of high grade assets to address forthcoming Basel III liquidity requirements,’ Reuters quotes Khalid Howladar, Moody’s global head of Islamic finance.”

[COMMENTARY] Given the Basel III requirements, it’s difficult to assess what would’ve been the real underlying demand. Nonetheless, this first ever western government sukuk launch was highly successful. Considering that developed country governments around the world want to encourage Islamic finance in their domestic markets, government sukuk offerings might become more common. If at some point the US Treasury finds it difficult to sell its dollar denominated bonds–after all, the Fed, China and others are reducing their purchases–perhaps it will even consider selling sukuk? That’ll be the day!
British Islamic bond debut becomes a market hit, June 26, 2014, RT, UK.

Fossil Free Indexes Launches First US Index. “Fossil Free Indexes LLC (FFI))… is the first index to leverage the long-term growth of US large cap indices while protecting investors from the risk of a carbon bubble. Over the ten years ending 5/30/14 the correlation between returns on FFIUS and the S&P 500 has been very high, suggesting that index investors need not sacrifice returns when choosing not to invest in the biggest carbon resource companies.”

[COMMENTARY] From an ethical investors’ viewpoint this index might protect from the possible, eventual, cost of carbon-based stranded assets among many fossil fuel companies. Of course, with Wall Street’s current love affair with shale oil and gas production, this would be a contrarian investment.
Fossil Free Indexes Launches First US Index, press release, June 26, 2014, Fossil Free Indexes, USA.

Presbyterians Vote to Divest Holdings to Pressure Israel. “After passionate debate over how best to help break the deadlock between Israel and the Palestinians, the Presbyterian Church (U.S.A.) voted on Friday at its general convention to divest from three companies that it says supply Israel with equipment used in the occupation of Palestinian territory.”

[COMMENTARY] Many are comparing this divestment campaign to the one that helped to end South African apartheid. However, there is one big difference: divestment to end apartheid included the support of many governments. As yet, this present campaign seems to have little, if any, government support. Hence, until this happens–which may well not happen–this campaign is unlikely to make sufficient headway to sway Israel from its current course of action. As for it affecting stock prices of companies engaged in these activities with Israel, it’ll depend on the size of the company and how far this campaign goes.
Presbyterians Vote to Divest Holdings to Pressure Israel, by Laurie Goodstein, June 20, 2014, The New York Times, USA.

Global Consumers Are Willing to Put Their Money Where Their Heart is When It Comes to Goods and Services from Companies Committed to Social Responsibility.“Fifty-five percent of global online consumers across 60 countries say they are willing to pay more for products and services provided by companies that are committed to positive social and environmental impact, according to a new study by Nielsen. The propensity to buy socially responsible brands is strongest in Asia-Pacific (64%), Latin America (63%) and Middle East/Africa (63%). The numbers for North America and Europe are 42 and 40 percent, respectively.”

[COMMENTARY] It’s fascinating that consumers in the Asia-Pacific and Latin American regions lead by a wide margin in their desire to purchase goods and services from socially responsible companies. Ethical investors might want to consider this information in selecting companies for their investments.
Global Consumers Are Willing to Put Their Money Where Their Heart is When It Comes to Goods and Services from Companies Committed to Social Responsibility, press release, June 17, 2014, Nielsen/Natural Marketing Institute, USA.

How Can Fixed-Income Investors Address ESG Considerations? “We spoke with Christoph M. Klein, CFA, who is a managing director, portfolio strategist, and head of ESG credit at Deutsche Asset & Wealth Management, based in Germany.”

[COMMENTARY] A useful discussion of ESG factors as they pertain to fixed income securities.
How Can Fixed-Income Investors Address ESG Considerations? Usman Hayat interviewing Christoph M. Klein, June 17, 2014, CFA Institute, USA.

S&P/TSX 60 ESG Index Launched by S&P Dow Jones Indices, RobecoSAM and Toronto Stock Exchange. “The S&P/TSX 60 ESG index is designed for market participants who currently use the S&P/TSX 60 and are looking to deepen the scope of their stock analysis to include sustainability criteria. The construction methodology is based on the S&P/TSX 60, while companies’ sustainability profiles are evaluated using the RobecoSAM Corporate Sustainability Assessment (CSA). Companies are then re-weighted according to their sustainability score, meaning those with a higher score are weighted higher in the S&P/TSX 60 ESG index than in the S&P/TSX 60.

[COMMENTARY] The interesting twist in this index is in bold above. Most ethical/SR/sustainable indices actually exclude those companies that perform poorly in these measures. As in every market, it’ll be fascinating to watch how this type of index performs! However, I wonder about the scale of the weightings, i.e., what will be the difference between top and poor performers?
S&P/TSX 60 ESG Index Launched by S&P Dow Jones Indices, RobecoSAM and Toronto Stock Exchange, press release, June 16, 2014, S&P Dow Jones Indices, RobecoSAM and Toronto Stock Exchange, Canada.

Islamic funds lose their lustre. “Mohammed Hassan, an analyst at Eurekahedge, said that the popularity of many Islamic funds diminished after the US Federal Reserve′s tapering announcements last year. This triggered widespread volatility in emerging markets, which many Islamic funds are heavily exposed to.”

[COMMENTARY] Islamic funds represent only about 5% of the Islamic finance industry. That industry, according to Ernst & Young, is scheduled to see it’s assets rising to $1.8 trillion by 2018. As emerging markets and interest in ethical investing grows, it’s likely that assets in Islamic funds will rise significantly as well. Thus, the present decline of Islamic funds is likely temporary.
Islamic funds lose their lustre, by Madison Marriage, June 15, 2014, The Financial Times, UK.

Green Bonds: European Acceptance, American Reluctance. (Page does not allow quoting.)

[COMMENTARY] The amount of green bonds issuance is growing substantially–up to about $20 billion in 2014, doubling that of 2013. However, as in believing that humans cause climate change, Americans are slow to buy into green bonds which are destined to be a significant portion of all bond issuance in the years ahead.
Green Bonds: European Acceptance, American Reluctance, by Joel Kranc, June 13, 2014, Institutional Investor, USA.

Addressing shortcomings in current corporate reporting. “Investors don′t have access to all the information they need today. Raj Thamotheram, Mark Van Clieaf and Alan Willis ask: why aren′t investors (and their clients) demanding it?”

[COMMENTARY] This is a terrific article about a topic that I’ve been writing about for many years! All investors should read it and take whatever action they can to demand improved corporate reporting.
Addressing shortcomings in current corporate reporting, by Raj Thamotheram, Mark Van Clieaf and Alan Willis, June 11, 2014, Top1000funds.com, USA.

Four in five investors consider sustainability issues … PwC survey. “Four in five investors have looked at sustainability issues in one or more investment contexts in the last year, according to research from PwC. However, investors also cited dissatisfaction with current reporting standards.”

[COMMENTARY] The interest in sustainability results largely from investors needs to mitigate investment risk. This is fine. It just reinforces the need for companies to make ESG/CSR/ethical concerns central to their operations. Furthermore, as research increasingly demonstrates, those companies that lead in this way tend to have better financial and stock performance than their peers who underperform in these measures. The dissatisfaction with reporting standards is a common theme of mine too, as you would’ve noticed reading my many commentaries related to it.
Four in five investors consider sustainability issues … PwC survey, by Charlotte Malone, June 9, 2014, Blue & Green Tomorrow, UK.

Allergan, Adobe and Ball lead 2014 Newsweek Green Rankings. “Those in the lead among the top 500 U.S. companies are Allergan, famous for Botox; Photoshop creator Adobe Systems; and Ball Corporation, which manufactures beer cans and other packaging (and formerly the iconic Ball Mason jars). Compare that with two years ago. In 2012, IBM ruled as No. 1, followed by Hewlett-Packard and Sprint-Nextel. Today, IBM has plummeted to the 224th spot, with HP at No. 38 and Sprint at No. 32.”

[COMMENTARY] In the article linked to here, GreenBiz does a good job in analyzing the ratings. Here’s another list that’s useful for ethical investors to review.
Allergan, Adobe and Ball lead 2014 Newsweek Green Rankings, by Elsa Wenzel, June 5, 2014, GreenBiz, USA. Review this too:Do Newsweek′s Green Rankings still matter? By Joel Makower, June 5, 2014, GreenBiz, USA.

Canada′s top 50 socially responsible corporations: 2014. “As the Canadian public becomes more aware of the impact of sustainability issues on the world around them, they are looking at the role of business in addressing these challenges,” said Michael Jantzi, Sustainalytics CEO. “Many of the world′s leading organizations have already embedded sustainability into their business models, and through the Top 50 feature Canadians can become more informed about corporate Canada′s efforts in this area.”

[COMMENTARY] Sustainalytics, the firm responsible for the list, has a long, reputable history in such analysis. Some ethical investors might be surprised by the inclusion of gold miners, but what Sustainalytics does is to provide best of sector analysis across all key industry groups. This is an excellent report for ethical investors to review.
Canada’s Top 50 socially responsible corporations: 2014, June 6, 2014, McLean’s, Canada.

Seventy-Two Percent (72%) of the S&P Index Published Corporate Sustainability Reports in 2013 — Dramatically Up from 52% in 2012 & Just About 20% in 2011. “Previously (in 2012) Governance & Accountability Institute’s research showed for the first time the companies in the S&P 500 that were not reporting were in the minority. Now, the latest 2013 data just released shows that in 2013 that minority group has become even smaller.”

[COMMENTARY] If companies didn’t believe that engaging in CSR activities was not material to their financial performance–they wouldn’t do it! Clearly, CSR is mainstream now. But what still has to be done is for regulators around the world to create and enforce some common CSR reporting standards as well as an independent auditing process to ensure honesty and accuracy in CSR reports. Currently, many CSR reports, particularly if they lack quantification of CSR activities with goals and objectives clearly delineated–might be more PR than factual.
Seventy-Two Percent (72%) of the S&P Index Published Corporate Sustainability Reports in 2013, press release, June 2, 2014, Governance & Accountability Institute, USA.

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