ScotiaMcLeod

Jason Braun is an investment executive with ScotiaMcLeod Inc. in Winnipeg, Canada. He manages investment portfolios for individuals, corporations and institutions covering more than $20 million in assets.

ScotiaMcLeod (SML) offers an environmental and an ethical fund: the Clean Environmental Equity Fund and the Ethical Growth Fund. Both were selected by SML from a spectrum of social and environmental funds, in part because they are the two largest: the ethical fund is worth about $2 billion and the clean fund is worth about $300 million.

'These are still smaller-sized funds,' says Braun. 'But when we look at their level of organization, administration and how smooth things might run and how well we can work with them, SML felt these funds were sizeable and stable enough to work with.'

According to Braun, SML offers these funds to appeal to the widest range of investors. Since their inception, they have enjoyed steady popularity, albeit within a certain niche market. 'It appears there is a demand from the public for both of these funds,' says Braun. 'The target market for these funds includes anyone who has an above-average level of social or environmental consciousness. It would be difficult to pinpoint a particular age or class of society.'

Risky or risk-averse?

Braun believes the funds are no more risky than the average middle-risk fund. 'The companies in these funds are mostly big blue-chip names,' he explains. 'If we look at the top ten holdings of the ethical fund we would see banks and big oil and gas companies. [In the past] environmental funds have contained some names that may be a little more volatile and risky because they included environmental services, many of which were in their infant stages.' As a result, investors in environmental funds may have needed to be a little more risk-tolerant.

Braun believes environment funds have now moved to a more diversified portfolio. 'The Clean Environment Fund may have a higher weighting towards the environmental sector, but it also contains other companies that are environmentally friendly.'

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He does not think consumers have caught on to the fact that companies with high environmental standards may be less risky investment prospects. In fact, clients rarely ask for information regarding the degree of environmental performance of companies in their portfolios, and much less the criteria for selecting environmentally or socially responsible companies.

'Consumers generally look at the top ten holdings of a fund, not at the environmental risk,' he reports. Any perceived link between decreased environmental risk and increased stability has not yet surfaced in portfolio management theory. 'We may evolve that way, but we're not there yet,' he says.

The market

The Ethical Fund seems to have a greater market share based on the number of consumers. However, Braun believes this may be a result of distribution. 'Credit unions are the primary distributors of ethical funds,' he explains. 'If you don't want a GIC, the only other alternative is the ethical fund. As a result, their assets are about four times greater than the Clean Fund.

'I would think there is actually just as much demand for environmentally responsible funds as there is for ethical funds.'

However, there is still a limited demand for these types of fund in Canada. It is difficult to predict whether this will change. 'I do believe that if you were to have two funds, one which averaged 20% and one averaging 15% return, and if the 15% fund is more socially responsible, some people will go with that one. But for most investors the first criterion is performance. Environmental and social responsibility come second. For these funds to be successful, they have to back it with performance.'

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As a result, to successfully market these funds it is essential to get across their performance. 'The number one reason why people invest in mutual funds is for long-term capital appreciation and above-average performance,' says Braun. 'As long as these funds produce above-average results, they will continue to grow. Maybe they will do even better because they are appealing to a certain niche market, but performance will magnify that or shrink it. Therefore, to increase the sales of a fund, one should position it in terms of high performance, and not only on the merits of high environmental and social responsibility.'

The future

Although this is an area that makes up a small part of Braun's business, he believes it will increase in the coming years. 'We've come a long way in the last 10 to 20 years. I think [these types of funds] will grow in popularity with additional fund managers coming onto the scene. In the end, the market will be driven by people's increasing awareness of environmental and social issues."

For more information on ethical investing, contact the Social Investment Organization of Canada.