The generally accepted rule for investors is to diversify their assets. This idea holds true even for investors who prefer to run their investments through a socially responsible screen that comports with their beliefs.
But what about investors who arent so much making moral or ethical decisions about their investments as ideological ones?
Take climate change, a highly political issue in the U.S.
If an investor, having read the myriad reports, concludes that climate change is eventually going to have a catastrophic impact on the global economy, he or she may try to focus on investments that will likely profit, or at least perform less badly, as things get hotter.
Conversely, if someone else dismisses the idea, they may see an opportunity to make a contrarian bet on companies that are likely to win if there is no global warming. (Bank Investment Consultant is not suggesting either strategy, but rather making the point that clients can try to work though major issues of the day and make investments according to how they feel things will play out.)
TINKERING AROUND THE EDGES
About one in six investors in the U.S. apply some social criteria to their portfolios, according to the U.S. Social Investment Forum, but it turns out most tend to just tinker around the edges: climate change worriers who exclude coal companies and oil companies from their portfolios, for example.
One company capitalizing on ideological beliefs is Motif Investing, an online brokerage in San Mateo, Calif., which offers themed portfolios of stocks that provide the potential for big returns if the investors political beliefs bear out.
For example, among the 150 pre-established themed portfolios developed by Motif analysts are two relating to the controversial Affordable Care Act.
As Peter Andes, director of research, explains, One motif of about 30 stocks is expected to perform well if Obamacare endures, while another has stocks that would benefit if Obamacare is canceled.
When it comes to climate, Andes explains that the 25-company strategy for profiting off global warming is not just a typical green investment screened list. Rather, it includes companies that are likely to benefit, at least in the nearer term, from a hotter globe. For example, he says, we include Monsanto and Syngenta, two GMO seed producers that would not make it through any green screen, but which we feel will become increasingly important in offering crops that require less water or that can survive hotter weather.
Other stocks on the list: renewable energy companies like Ormat Technologies (a geothermal and energy recovery firm), Sun Power and Canadian Solar, which should do well if governments eventually really clamp down on carbon-based energy generation.
The companies in this motif, as with other motifs, are rebalanced on a quarterly basis, Andes says, based upon reviews of the climate change research, and on company performance. Andes adds that Motif Investing also has an advisor platform.
AN ALTERNATIVE REALITY
As for the skeptics, Andes says there hasnt been interest in a no-climate change motif. But such a motif might try to capitalize on an alternative reality in which climate change turns out to have been wrong.
On our request, he created a mock-up climate contrarian motif, which has a 63% holding in oil companies, 10% in coal companies, 6.7% in property insurance firms, 6% in transportation, and, perhaps to add a touch of humor, 10% in air-conditioning and refrigeration firms.
In this hypothetical, the theory goes as such: Oil companies should do well as people return to gas-guzzling SUVs and high-performance muscle cars. Coal companies, whose shares are currently beaten down as coal-fired power plants in the U.S. and China are shuttered over global warming fears, would return to favor. Property insurance firms would find themselves sitting on piles of cash from excess premiums, and car companies will benefit from a return to big higher-markup vehicles.
In a case of such ideologically based themed investing, one should think long term. For example, while reports about climate change look dire, it will be years before theres any significant jump in average temperatures and resulting sea-level rise. This is not a short investment strategy, says Andes. In fact, the climate change motif in mid-June was down 4.7% over 12 months, compared with an S&P index that was up about 10%.
Mark Regier, VP for stewardship investing at Everence Financial, a Mennonite investment firm in Indiana, says making climate change investments can be daunting in the short term. People jumped on wind energy, buying windmill makers and wind farms, but then the market crashed when it turned out there wasnt the infrastructure to get the energy from the windmills to where the demand was. You need to be careful because while these ideas can work out in the long run, they can be hit by huge swings in public sentiment and public policy.
Everence does have a proactive climate change investment strategy, he says, that integrates a focus on how companies are dealing with and adjusting to climate change into our research into stocks or bonds to buy. Meanwhile Regier doesnt offer much hope for climate change skeptics looking to make a killing on a contrarian bet. If they go out and buy cheap oceanfront property they should be prepared to swim to it, he laughs.