Despite a long list of corporate scandals that have put business morality under the spotlight, ethical or so-called socially responsible investment (SRI) funds continue to be of little interest to Canadians, industry sources say.
"There just isn’t much of a market for them," said one fund executive. "Clients never ask, so it’s not on our radar."
At present, only a handful of fund companies offer an ethical fund. None of the Big Six banks are in the ethical fund business.
The lack of interest is a Canadian phenomenon. According to 2002 data from Toronto’s Social Investment Organization, about $51.4-billion is invested in this country in all socially responsible assets, a figure that includes mutual, institutional and pension funds. In contrast, U.S. ethical mutual funds alone manage about $151-billion (U.S.) in assets. In Europe, ethical funds are common holdings of small investors.
"Canadians generally lag a little . . . there is no question the pickup hasn’t been as good," said Michael Jantzi, founder and president of Jantzi Research Inc. The Toronto firm pioneered SRI equity research and provides advice to a long list of institutional clients.
Critics in the fund industry argue the problem with ethical investing begins with its definition. Jantzi Research, for example, has some exclusionary criteria, such as rejecting tobacco companies and weapons-related contractors. But Jantzi considers the investment dollar as a means to change corporate behaviour. As a result, some resource giants are included in the Jantzi Social Index. The idea is to reward firms that have better track records within their respective sectors.
"Eliminating the entire mining, oil or paper sector didn’t provide a lot of incentive for those clients to improve," Mr. Jantzi said.
But several fund companies complain SRI criteria are subjective and that non-ethical funds mull over many of the same issues when making investment decisions. The result is that holdings in SRI and non-SRI funds are often identical.
"All of our funds are responsible by nature," said Graeme Harris, spokesman for RBC Asset Management Inc. "The standards by which anyone would define socially responsible or ethical investing differ from person to person."
But SRI fund companies argue their investing strategies are little understood and that it’s difficult to get the attention of key distributors and advisers. The two largest — Investors Group’s Summa fund and the Ethical Funds Inc.’s family of funds — have limited distribution.
"It’s a very small market niche," said Gary Hawton, chief executive officer of Meritas Mutual Funds, a Cambridge, Ont.-based SRI firm. "We are just trying to make sure that we are around and they are aware of us."
But mediocre performance remains the single biggest stumbling block for ethical funds. Mr. Jantzi concedes that "SRI mutual funds haven’t been blowing the light out" and, by and large, have lagged the returns posted by many equity funds and the S&P/TSX composite index in recent years.
"The bias within the financial investment community still seems to be that if you invest in social responsible investing you are actually going to take a hit on returns," said Brent Sutton, vice-president of Phillips Hager & North Investment Management Ltd.
Two years ago, the Vancouver firm launched a community-values family of funds, including a Canadian equity fund. For the 12-month period ended July 31, the $21-million fund reported a respectable 18-per-cent return, matching gains posted by the S&P/TSX index.
"People are aware of what SRI is much more so than they were two or three years ago. Now whether that talk and interest factor translates into demand, that’s really the $64,000 question at this point in time," Mr. Sutton said.