In 2017 the KiwiSaver landscape shifted dramatically when members discovered almost all funds were invested in nuclear weapons, land mines, cluster munitions and tobacco. Members voted with their wallets, and commanded their managers to exclude these investments. Most have.
The voracity of the demand surprised many KiwiSaver managers. For me it was a moment we should all be proud of as, in a way, we helped move the world one step closer to conscious investing.
The exclusions at the time triggered our curiosity. Were traditional 'sin' stocks really the outperformers our industry has always assumed they were?
We began a six-month project to see what impact excluding these industries would have on investment returns. We wanted to test the notion that 'sin was in' when it came to investing.
To properly understand this you need lots of data and analysis and it's now freely available.
The largest meta-study, involving analysis of more than 2,000 separate academic studies, shows better returns can be achieved by investing with environmental, social and governance factors as key criteria.
Investing this can be inclusionary, that is, actively choosing companies that do a good job regardless of where they operate, or exclusionary, eliminating all companies in undesirable sectors.
Any way we looked at it, the results were stunning.
Had we been investing for the past five years, and excluding large companies in tobacco, gambling, pornography, fossil fuel extraction, weapons and alcohol, we would have had +0.19 per cent per annum better returns for our conservative funds, +0.54 per cent for balanced funds and +0.79 per cent for growth funds.
As a passive manager, our fund returns are basically the market returns less fees, so these assumptions are a good proxy for the impact that excluding sin stocks would have on KiwiSaver returns overall.
Soon enough the question KiwiSaver members might be asking their managers is, 'Why haven't you excluded them?', rather than, 'Why have you?'.
But there's a problem with excluding 'sin' stocks, that is, where you draw the line?
Cast the definitions too wide and you can have nothing to invest in, for example, by some definitions, every company uses fossil fuels. Our selections are orthodox and fairly uncontentious, but what constitutes a 'sin' stock is a debate that will never go away, and it shouldn't.
Part of the underperformance can be explained by the reluctance of traditional suppliers of capital to fund publically contentious industries. It's a brave bank now that gives credit to tobacco companies, and that could be the case soon enough with fossil fuel extraction, weapons, pornography and alcohol.
Asset managers are moving this way too. Almost 300 global asset management firms are screening out sin stocks, representing almost 5 per cent of global superannuation savings.
Simplicity is the first KiwiSaver manager to exclude these sectors from all funds in NZ, but given the potential performance benefits, we are very unlikely to be the last.
Somewhat ironically, one of beneficiaries of this global trend will be the NZ sharemarket. While our exclusions apply to 15 per cent of listed companies in established indexes offshore, in NZ only one company in the NZX50 is impacted - SkyCity.
Manager decisions to exclude sin stocks isn't occurring in a vacuum either.
It's clear now that most KiwiSaver members don't want to be invested in them. A recent Consumer Magazine survey showed a clear majority not wanting their money invested in nuclear power, weapons, tobacco, pornography, gaming and alcohol. A survey of our members last year supported this view.
But it's not ultimately asset managers or investors who will decide these companies' fates, it's their customers.
To my mind, it is this key to understanding why sin stocks have become under performers. Smarter, more informed consumers have decided to consume less of a bad thing (for example tobacco, oil), never to consume some things (weapons, gambling) or pay nothing for it (pornography).
Technology challenges these industries' ability to make money too - online purchasing of alcohol and 3D printing of hand guns.
So, in this sense consumers and investors are making more informed decisions. New era companies are treating them like the savvy, well informed consumers they are, and outperforming sunset 'sin' industries that have used fear, emotion, and addiction as legitimate marketing strategies.
In financial markets, for the longest time, sin was in. It was a very brave fund manager who would do what we're now doing - removing all sin stocks from all our funds. But history shows it should be good for returns, it's supported by industry and consumer behaviour, and it's what KiwiSaver members want.
Now, wonderfully, investing with a conscience is a no brainer. And there is something very nice about letting KiwiSaver members money do the talking.
