GETTING PERSONAL CANADA: Virtue May Now Trump Vice

The following was published in the Business Section of The Wall Street Journal, Digital Network

By Monica Gutschi, of DOW JONES NEWSWIRES TORONTO (Dow Jones)

When it comes to the stock market, vice has always paid better than virtue. But that may be changing.

“Up until now, probably the evidence might lean towards the ‘sin’ category doing a bit better, but I’m not sure going forward that would still be the case,” says Ron Robins, a former investment analyst and founder of the ‘Investing for the Soul’ website.

For many years the so-called “sin” industries — tobacco, alcohol, gambling, defence and in some cases, extractive — have been the better investing option. More saintly choices, known as socially responsible investing (SRI), were limited, often high-cost and in the case of emerging sectors like alternative energy, relatively illiquid.

Robins now believes the tables may be turning. Investors are increasingly concerned about corporate ethics and the potential regulatory and litigation risks involved, lifestyles are changing with a consequent impact on tobacco and alcohol sales, fees and other costs involved in SRI are dropping, the addition of Environmental, Social and Corporate Governance, or ESG, issues to the SRI mix have increased available investment options, and high-profile incidents like the BP oil leak into the Gulf of Mexico are spurring activist shareholders to pressure for change. Additionally, highly indebted governments are prone to raising “sin” taxes on alcohol and tobacco, which could reduce sales, and potentially, share prices, he says.

“Over the next five to 10 years, and with the effects of the sovereign-debt crises upon us, I suspect that ethical stock portfolios could outperform both the sin and conventional variety,” Robins wrote in a recent article.

Indeed, he notes the 2008 stock-market plunge has raised investor consciousness, and that has given more virtuous investing options a new edge. He cites a number of recent studies which show that, over the past year or so, investing in virtue has posted better returns than vice.

The most recent U.S.- based study was done in February by a group of Santa Clara University researchers. It found that while Domini Social Index, a compilation of 400 publicly traded companies that meet varying social and environmental criteria, has underperformed the S&P 500 over the five- and 10-year horizon, it has outperformed in the past three years. The recent gains mean that since its start in 1990, the DSI 400 has returned 7.74% annually versus 7.01% for the S&P 500.

The study also found the DSI 400 to be more volatile than the S&P 500, as measured by standard deviation, but with a higher Sharpe ratio, which measures the return above the risk-free interest rate.

Meanwhile, the study says the Vice Fund, or VICEX, which is run by Mutuals Advisors Inc., has easily outperformed the S&P 500 since its inception in 2002. Its average annual return as of 2006 was 18.24% versus 11.87% for the S&P 500. But its outperformance gap has narrowed significantly since 2008, and the Santa Clara study also found that in the past year it has even underperformed the DSEFX, which tracks the DSI 400.

Incidentally, Robins notes, in the 12 months ended June 30, the DSEFX has gained 16.8%, outpacing the VICEX’s 7.7% increase.

Canada’s Social Investment Organization says that from the start of 2000 to the end of 2009, the Jantzi Social Index produced an annual return of 5.68%, compared with 5.61% for the S&P/TSX Composite and 5.55% for the S&P/TSX 60.

-Monica Gutschi, Dow Jones Newswires; 416-306-2017; monica.gutschi@dowjones.com


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