I have a school friend who has recently come into some money. Not a “never have to work again” sum of money. More a “that would be a deposit on a house in London” type of amount. And she was asking people for some advice. Someone suggested she invest in in Unilever and Shell – which brought a horrified response: “But I’m only interested in ethical investing. I couldn’t possibly invest in Shell, because they are drilling in the Arctic.”
Putting aside the obvious objection: presumably if Shell should not drill for oil in the Arctic, because it is a remote region, the oil company should concentrate on drilling for oil in heavily populated, built up areas?
But this did get me thinking about the ethics of investing. When I studied ethics at school and university, this involved technical discussions about ancient Greek philosphers, John Stewart Mill and Immanuel Kant, rational arguments, logical reasoning and terms like the “categorical imperative”. I always had the feeling that we were not learning about the way individuals behave, instead how great thinkers thought everybody ought to behave. Not the world as it “is”, but instead what philosophers believed it “ought” to be.
Fortunately a social psychologist called Jonathan Haidt, who has drawn on 25 years of research, seems to have debunked a lot of this style of moral philosophy. His research shows how moral judgments arise not from reason, but from gut feelings. And this explains how people form their world view: liberal or conservative, atheist or religious, good and evil. This explains Bertrand Russell’s quip that
“In general, the passion for a belief is inversely proportional to the evidence in its favour.”
Haidt suggests there are 5 evolved capacities of ethical thinking:
I think that my friend didn’t like the idea of investing in Shell, because they were “harming the environment.” Which explains the strong reaction.
But very often “ethical investing” is actually a way of parting naïve customers with their money. Recently Hanergy, a solar power manufacturer has turned out to be a billion dollar fraud. John Hempton, the famous short seller visited the factory a few months ago and pointed out “This is the only place I have ever seen solar cells set up so that they are not orientated towards the sun.”
Given that investing is full of pitfalls, it is understandable that someone might want to outsource it to professional experts. I’m not so sure this is a good idea though. Professional fund managers are very good at helping themselves to your money without you noticing. A 1% annual charge might sound a small amount, but over a working life time it reduces the value of your pension by a quarter. Ever since 1997, when the Office of Fair Trading (OFT) highlighted the opacity of money management charges, to the Myners Report (2001) to the FSA report “Conflicts of Interest between asset managers and their customers: Identifying and Mitigating the Risks” (2012) and The Kay Review of UK Equity Markets and Long Term Decision Making (2012) to a DWP study in “Better workplace pensions, putting savers’ interests first” (Oct 2014) regulators have been trying to make fees and charges more transparent. The regularity of these reports suggests they have been unsuccessful. So perhaps it is better to recognise that the fund managers are always likely to take advantage of their customers. See the world how it is, not what we would like it to be.
Because of this behaviour, a good heuristic is:
“Never buy funds promoted by fund managers, which tend to be bad value for money. Instead buy shares in the fund management company itself, because they benefit from the opaque pricing.”
Unethical? Perhaps. But this heuristic has worked well over the last few years, helped by a rising stock market, Jupiter has increased by 2.5x since it listed on the stock exchange in 2010. Schroders has quadrupled in value since 2009, a “four bagger”.
With this in mind I wondered if I should recommend Impax Asset Management to my friend. Impax are a fund manager that specialises in environmental companies (solar panels, wind farms, alternative energy etc). They haven’t done as well as Schroders or Jupiter – in part because environmental investing actually heavily depends on government subsidies. The Spanish government drastically cut its subsidies for solar power in 2009, blaming the financial crisis – which made the sector a lot less profitable to invest.
But just like philosophy, when you invest, it is important to see the world as it “is”, not how you think it “ought” to be. Rather than solar power and environmentally friendly resources, Impax seems to be a play on the sustainability (or not) of government subsidies.
I don’t think it is a good idea to abdicate responsibility for finance to someone else. Like health, there are simple heuristics to follow (eat healthily, take regular exercise and sleep well) and these simple heuristics work better than taking lots of pills.
Similarly, there are also good heuristics for investing. The ones below were suggested to me in a conversation with Gerd Gigarenzer, and so I passed on his advice:
Buy what you yourself are familiar with (for instance you are a customer of the firm, and use the product).
Pay attention to your costs of investing.
And that seems to me both i) ethical and ii) treating the world as it is, not as we think it ought to be.