A Canter, Futuregrowth, IRF Conference 09 2010. Responsible Investing: Should it be regulated? Can...

A Canter, Futuregrowth, IRF Conference 09 2010


Responsible Investing: Should it be regulated? Can it be regulated?Andrew Canter, Futuregrowth Asset Management

September 2010

6 A Canter, Futuregrowth, IRF Conference 09 2010

• Responsible Investing: What it is… what its not

• SRI & ESG: Interjecting some reality

• SRI: Taking responsibility... Exercising choice

• Prescription?

• What can be done to facilitate SRI?

Agenda


Futuregrowth’s 3 categories of Responsible Investing

1. Positively screened investments“ I want my money to do good things”

(ie infrastructure, BEE, affordable housing, SMMI finance)

2. Negatively screened investments“I don’t want my money to support bad things”

(ie tobacco, alcohol, gambling, arms, pornography)

3. Investor engagement“My money has power and responsibility”

(Using plutocracy to effect change)

“Economic” or “Social” motives

Goals: •Risk Reduction•Returns

Economic Social

Responsible Investing

Socially Responsible Investing

Positive/Negative Screening:•Environmental (E)•Social (S)•Governance (G)

Investor Activism

Goals: •Express Values•Developmental impact

High impact: specialisedLow impact: scaleable, low cost


Economic ESG: “Mainstreaming”It’s a matter of time before…

… statistics prove that “good” companies perform better…

… and ESG screens are in all investment decision processes.

See “Does Governance Matter to Long-Term Investment Performance?” David Beatty, CFA Institute Conference 05/2008


Points of confusion… what SRI is and isn’t

SRI = how the money is invested (returns & impact)

PROCUREMENT = who you choose to work with

IS SRI THE SAME AS POSITIVE PROCUREMENT?

Query Service Providers’

• BEE ownership & control

• Staff composition & training

• Procurement policies

• CSI program

• SRI Product

• ethics, industry engagement, environmental impact, etc.



SRI = how the money is invested (returns & impact)

CSI = giving back to the community (grants, gifts, goodwill)

IS SRI THE SAME AS CORPORATE SOCIAL INVESTMENT?


IS SRI AN ASSET CLASS?

Sample Retirement Fund

Equities 65.0%

Bonds 25.0%

Cash 4.0%

Property 2.0%

Inflation Linked 2.0%

Private Equity 2.0%

Total 100%


SRI is a theme, must fit into an strategic asset allocation

6% SRI… strategic asset allocation maintained

With SRI Allocation

Equities 62.0%

SRI Equities 3.0%

Bonds 23.0%

SRI Bonds 2.0%

Cash 4.0%

Property 1.5%

SRI Property 0.5%

Inflation Linked 2.0%

Private Equity 1.5%

SRI Private Equity 0.5%

Total 100%


BRIDGE CITY MALL, KWA MASHU

Is it developmental?

• Services Inanda, Ntuzuma, KwaMashu

• 10% reserved for local shop owners

• Local subcontractors

• Transport hub: train, bus, taxi

• Government offices

• Accessible services; price:quality



• Investment principles prevail (Risk:Return)

• SRI is not subsidy finance

DOES SRI MEAN LOWER RETURNS?


SRI Equity Performance


Alexander Forbes Bond Survey

3 YEAR RISK VS RETURN GRAPH AS AT 30 JUNE 2010

Futuregrowth Infrastructure & Development Bond Fund

Community Gilt Fund

Cadiz Infrastructure Bond Fund

Alexander Forbes TDI Bond Survey


Income and capital performance as at 31 August 2010

*annualised

Community Property Fund

9.6711.15

14.86 15.23 15.17

7.32

11.7310.56

9.37 9.82

0

5

10

15

20

1 year 3 years* 5 years* 7 years* 10 years*

Community Property Fund CPI + 4%



If investors get risk adjusted returns…

Private sector keeps score by returns, public sector uses a balanced scorecard

THE ROLE OF GOVERNMENT & DEVELOPMENT FINANCE INSTITUTIONS(DFIs: DBSA, IDC, Landbank, Khula, NHFC, etc, etc)

…then who offers subsidised capital?

Private Sector

DFIs

Doing what other’s don’t X X

Lower liquidity deals X X

Higher risk deals X X

Targeted outcomes X X

Filling “risk gaps”/market failures X X

Providing subsidised capital X

Cross-subsidise business lines X

Operational inefficiency X

Creating enabling environment X

DFI = Development Finance Institution

TRUST FOR URBAN HOUSING FINANCE (TUHF)


• Mortgage lender in Johannesburg inner city

• Lack of diversity in book, short life, not profit driven...

• ...but capacity & capital from DFIs

A Canter, Futuregrowth, IRF Conference 09 2010DFI = Development Finance Institution


SRI & ESG: Interjecting some reality


Interjecting some reality into ESG (1)

• Narrow universe… lower portfolio efficiency

• Excludes some high ROE/cash flow sectors

• Evidence of out-performance?

• SRI defies definition


Interjecting some reality into ESG (2)

EDHEC Business School 6 year study (2002-2007) of 124

European SRI funds:

“did not identify alpha values both positive and statistically significant for SRI funds. In fact… most… obtained negative, but not statistically significant, alpha…”

“it seems regrettable to us that, despite the lack of empirical evidence of… outperformance, asset management firms and consultants have larded their communications with promises of SRI fund outperformance and failed to express the necessary reservations.”

SRI Equity Performance


DJSI World = DJ Sustainability Index World.

DJTSM = DJ Global Large Cap Total Stock Market Index


SRI: Taking Responsibility… Exercising Choice

DE LIEFDE HOENDERS

After

After

PDI = Previously Disadvantaged Individual, BEE = Black Economic Empowerment

| Mortgage finance to build houses

| Support/off-take from large processor

| Loans on production cash-flows

… 30% PDI farmworker ownership


Before


SRI: Fads, Trends and Fashions…


Living in a world of non-conforming viewsQuestion Accountants and you should get the same answer

Question Asset Managers… you’ll get numerous answers!

… ask about SRI and you will get double the number of opinions

Question Doctors and you hope to get a similar opinion


SA TAXI FINANCE


• Vehicle finance for taxi drivers

• 3000 taxi owners/drivers... Over 5500 families affected

• Each taxi a small businesses/SMMEs

• Many drivers denied finance by banksA Canter, Futuregrowth, IRF Conference 09 2010

Reg 28: should be enabling

“retirement funds are encouraged to consider the broader social impact of their investments on the development of the nation”

Prescription: Do the ends do justify the means?

• A challenge to property rights: Is it constitutional?

• Creates uncertainty around long-term savings

• Money is not the problem – capacity to deliver remains a problem

• No SRI standard: Who decides what to prescribe?

• Distorts capital markets... its a “tax” on returns

• If government prescribes, will they underwrite the risk?

• Government can influence

a) the funds where they are direct stakeholders, and

b) the well capitalised DFIs

• Danger of money flood and poor deals: Value will be lost by funds


• Johannesburg-Maputo toll road

• Public-Private Partnership

• 30 year concession

• Privately funded and managed

FSC Council: Toll roads are not infrastructure

Is it developmental?TRAC – N4 Toll Road


Socially Responsible Investing Principles• “SRI” is a matter of choice and judgment…

• …no “one size fits all”, and investors should choose their aspirations

• Investors should demand suitable returns

• Subsidies/kick-starts are the job of government

• SRI is not an “asset class” funds’ asset allocation must prevail

• Differentiate SRI from Positive Procurement (and do both)

• Regulation is very difficult, conflicted, and subjective

You can deliver impact, while also looking after your members


What can we do to promote SRI?

• Support the principles required for a modern economy

• Property rights, rule-of-law, free press, free markets, education

• Take a stand against corruption, conflict-of-interest.

• Build investment processes that earn sustainably high returns

• Find a common language of RI/SRI

• Be honest about risks and returns

• Admit that SRI is full of judgment and biases

• Do unto others money what you would do unto your own money



phase 2 during construction

GRACE BIBLE CHURCH, SOWETO

phase 1

• Evangelical church in Soweto

• 11,000 members

• Provided mortgage loan

• Finance denied by bank

• Community facility

• ABET/training/bursaries

• Computer school

• Initial loan was about $1m

Sometimes SRI is doing something that others won’t …




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