No Better Time To Know What You’re Investing In

Whether it’s the Church of England divesting from Wonga or the UK government divesting from Russia, wake up and smell your portfolio  

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Editor, etf.com Europe
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Reviewed by: Rachael Revesz
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Edited by: Rachael Revesz
It might have come as a shock to learn that the Church of England had invested in Wonga, the payday loans company that portrays itself as a fair lender but boasts shockingly high interest rates.

It might also come as a nasty surprise that the UK government still supplies arms and weapons to Russia. They are, as we speak, re-wording their trading contracts to make sure their PR does not completely go down the pan.

The message is clear – understand what you invest in. That stock might fit within a low volatility band, but it might also have trade agreements with weapons manufacturers.

If you pick a transparent investment, due diligence becomes much easier. Compared to an investment trust or an actively managed mutual fund, an index tracker is the most transparent investment out there. This is because the index constituents are available online and are updated regularly.

Take a quick look at the Russian ETFs. Whether it’s the MSCI Russia or the Dow Jones Russia GDR Index, they are heavily weighted to state-owned enterprises, with the vast bulk in oil and gas and financials – the very areas the international community wants to hurt, not to finance.

The index is transparent, but the decision as to what you want to invest in comes down to you. At least via ETFs, investors can make an informed decision and are not reliant on active mangers’ every-so-often conference calls organised by the marketing department to explain why they ploughed £40 million last month into Gazprom.

Quick tip – Legal & General Investment Management does not allow securities lending on their tracker funds, as that would sacrifice their right to vote in a company and give them less influence on their ethics and corporate governance.

Secondly, there are some very good ethical and actively managed funds from providers like Alliance Trust. There is also a limited selection of passive ethical funds, and you can find more information in this article.

One example is the FTSE4Good Index, which screens out tobacco companies and weapons manufacturers, as well as ensuring decent minimum standards of corporate governance, sustainability and human rights for constituent companies.

But this approach is limited, as John Redwood, chairman of the investment committee for fund manager Charles Stanley Pan Asset and a Conservative MP, wrote in his blog last week.

“[Whilst you can exclude the] main weapons makers, you leave in such a portfolio the banks that finance them, the advisory businesses that help them, the suppliers that sell them the components and all the rest,” he wrote.

Redwood then questioned whether an ethical investor should rule out government bonds, as governments design, order, pay for and use weapons, and some of this activity is paid for by borrowing money on the bond market.

The problem with this whole debate is it comes down to morals. Weapons kill people, but some argue they are needed for self-defence. Your take on tobacco companies might be different depending on whether you enjoy a cigarette, or whether your uncle died of lung cancer. What is right and wrong?

The second issue is, where does it end? An ardent Scottish independence supporter could buy J.K. Rowling’s latest novel and discover he has indirectly funded the Better Together campaign.

The simple conclusion is: don’t make the same mistake as the Church of England. Practise what you preach, pick a transparent investment and take responsibility for where your profits and losses are coming from. Remember to monitor your portfolio as change can happen much quicker than you expect.

Your returns might still go up and down, but you may well sleep a little easier at night.

 

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.