Deloitte’s latest Millennials survey confirms a powerful trend: young people turning away from big business in record numbers. The survey does not consider how this trend will drive growth in ethical investing and boost the profits of asset managers in this field.
The recently released annual Deloitte survey of Millennials (aged 24-35) identified a sharp drop in perceptions of ethical corporate behaviour. Only 48 per cent of survey respondents believe business behaves ethically, from 65 per cent a year earlier.
About two thirds of respondents say business has no ambition beyond making money.
As previous surveys found, Millennials think business should be measured beyond financial performance. Younger people want to buy from, work for and invest in companies that make money and positively affect society, inclusion, diversity, innovation and job creation.
Cynics will argue that another survey showing Millennial disenchantment is no surprise. Higher property prices, fewer graduate jobs and the automation of tasks are feeding into Millennial distrust of big business. For all the angst, Millennials supposedly do little about these issues.
I’m not so sure. As more Millennials head into their thirties, other life issues are prioritised: marriage, starting a family, saving a house deposit and building a career. Sensible Millennials think more about investment and some take an early interest in superannuation.
Expect more Millennials to align their investment strategy with their social conscience in coming years. That means less investment in activities that harm the planet, such as coal mining, and more investment in companies and sectors that do commercial and social good.
The ethical investment industry has never had it so good. Long seen as a fringe form of investing, ethical investing is rapidly growing its market share, off a low base – a trend I have identified previously for The Bull and retain a strong positive view on.
Ethical-fund assets grew 26 per cent to $64.9 billion in 2016, shows the latest Responsible Investment Association Australasia Benchmark Report. A separate RIAA survey in November 2017 found nine out of 10 Australians want their superannuation managed responsibly.
This trend is undeniable. Just as consumers choose cage-free eggs and ethically grown coffee at the supermarket, so too are they favouring investment products that do less harm. The upshot is more companies and sectors being excluded from the investable universe of some managers.
This trend is playing out in three ways. The first is growth in ethical funds that exclude tobacco, weapons and other harmful sectors. The second is growth in the much larger category of broad responsible investing through Environmental, Social and Governance (ESG) filters on stocks. Sectors are not excluded, but fund managers factor ESG ratings into investment decisions.
The third is a blurring of ethical/ESG asset approaches. Several fund managers that use ESG filters now exclude tobacco and weapons from their investable universe. More will join them, and pressure to exclude other sectors, such as sugar and coal, will intensify.
The responsible-investment boom will encourage traditional asset managers to adopt more of an ethical investment mindset in terms of sector/stock exclusion. They won’t go as far as ethical screening (that would require higher annual fees), but the focus on investing in companies that do commercial and social good will rise, in response to investor demands.
My favoured play on ethical investing has been listed asset manager Australian Ethical Investment. I last wrote about it for The Bull in June 2017 at $90 a share. Australian Ethical hit a 52-week high of $173 and now trades at $136.
Unit-pricing errors last year and related technology and staff costs spooked the market, but Australian Ethical continues to grow assets under management and lift earnings. The stock offers some value for long-term investors who are comfortable with micro-cap stocks.
Chart 1: Australian Ethical InvestmentSource: The Bull
Morphic Ethical Equities Fund, a listed investment company, is another option. The LIC listed on ASX last year through an Initial Public Offering and, like many recent LIC IPOs, trades at a discount to its stated pre-tax Net Tangible Assets (NTA).
The $46-million LIC was priced at a 10.9 per cent discount to NTA at the end of April 2018, ASX data shows. That means investors can buy Morphic at a discount to the value of its underlying portfolio, although some LIC managers trade at a discount for good reason.
Morphic Asset Management has a solid long-term record in global investing and managing director Jack Lowenstein had a role in building Hunter Hall, a prominent ethical-investment manager.
Morphic Ethical Equities Fund invests in global stocks and excludes companies involved in coal, uranium mining, oil and gas, intensive animal farming and aquaculture, tobacco and alcohol, armaments, gambling, rain-forest and old-growth logging. Unusually, the LIC can take short positions in stocks that have poor ethical practices – a strategy that makes sense.
Morphic’s average annual return of about 11 per cent since inception is two percentage points below its benchmark index. A rising resource sector possibly explains part of the underperformance, given Morphic excludes oil and gas stocks, for example.
Investors wanting a fund with strict ethical criteria could do worse than consider Morphic when it trades at a double-digit discount to its underlying portfolio. Like Australian ethical, Morphic is leveraged to growth in ethical investing.
As a micro-cap LIC that is affected by current movements (given its global equities focus), Morphic suits experienced, long-term investors.
Chart 2: Morphic Ethical Equities FundSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at May 9, 2018.