KiwiSaver funds get access to ethical investment option

Robin Bowerman, head of market strategy for Vanguard Australia. Photo/Supplied.

The world's biggest fund manager is to provide KiwiSaver investors with an ethical investment option after savers were left reeling in the wake of revelations that some of the major schemes had invested their money in cluster bomb, landmine and tobacco makers.

Vanguard, which manages $5.1 trillion worldwide, has announced it will launch a new international share fund that will exclude investment in tobacco companies, controversial weapons and nuclear weapons.

The fund will be open to wholesale investors in both New Zealand and Australia giving KiwiSaver funds a chance to provide their investors with a more palatable option.

Major KiwiSaver providers have been left back-pedalling and trying to exit their controversial investments after a public storm erupted in the wake of revelations by the Herald and RNZ that New Zealanders had unwittingly invested $152m in arms manufacturers and big tobacco companies through their retirement savings.

While providers moved quickly to exit direct investments many of the investments were made by third parties including index tracking funds which provide cheap access to a large range of listed companies making individual companies difficult to exclude.

But the new Vanguard International Shares Select Exclusions Index fund, due to launch by the end of the year, will make this possible.

Robin Bowerman, head of market strategy for Vanguard Australia, said the specialist fund had been on its radar for development next year but its launch had been accelerated by the situation in New Zealand.

"This is about giving Kiwi investors choice," he said.

Bowerman said the fund would exclude 23 companies in total while providing access to a further 1500 global companies and he expected any performance difference to be small.

He said it would be up to individual KiwiSaver providers to switch to the fund and if they chose to do so it would take only a few days to transition the investment.

Sam Stubbs, chief executive of new non-profit KiwiSaver provider Simplicity, applauded Vanguard for taking swift and decisive action in the face of growing demand for more ethical investment options in New Zealand.

"This response from one of the world's largest investment managers shows that they have listened to the concerns of Kiwis and acted quickly to offer a solution."

He said Simplicity which invests all its KiwiSaver assets via Vanguard would be switching 100 per cent of its investments to the new fund.

But while the Vanguard fund will exclude tobacco, controversial weapons and nuclear weapons it won't go as far as taking climate change into account.

That's despite the $30 billion New Zealand Superannuation Fund recently announcing plans to tackle climate change issues through its investment decisions.

Bowerman said the super fund was looking at its investments through a sovereign wealth lens.

He said there was a growing global focus on environmental, social and governance issues for investors and investment products would reflect this change in time.

"We have seen a strong use of exclusions over the last few years - it is very much part of a global dialogue. I think it is an area that will continue to evolve."

But he said investors also had to understand there could be a trade-off for making those investment decisions.

Vanguard International Shares Select Exclusions Index Fund
*available to wholesale investors in New Zealand and Australia by the end of the year
*will exclude 23 companies but provide access to a further 1500+
*will track the MSCI World ex Australia ex Tobacco ex Controversial Weapons ex Nuclear Weapons Index.
*will have an annual management fee of 0.26 per cent charge to KiwiSaver providers