‘Sin Stocks’: The Dark Side of Investing

Today, let’s discuss the interesting conundrum of KiwiSaver funds…and whether or not they ought to invest in ‘sin stocks’.

In light of what’s happened in Christchurch, the mainstream press is crying out against major KiwiSaver providers to dump any and all positions tied to assault rifles.

And this commotion follows just behind similar flak towards Facebook, Google, and Twitter for their questionable roles in the social media world of smut.

Other black sheep sectors include tobacco, alcohol, nuclear weapons, cluster bombs, and companies connected to cases of animal cruelty.

As you’d expect, most KiwiSaver funds are quick to proclaim that they have no or limited exposure to these sorts of sectors…

They want to distance themselves from bad news as best as they can.

But this result proves that the mainstream press has significant influence over fund providers…and therefore over your retirement.

For me, that’s problematic.

It’s a problem because the mainstream press doesn’t have your best interest in mind. They have sales in mind. They’ll publish whatever gets clicks and opens. They don’t have a fiduciary duty to act in your best interest.

So if they publish a story condemning KiwiSaver investments in XYZ sector, they’re not doing it to help your retirement…they’re doing it because it’s hot news.

That disconnect between the media’s interest and your interest is dangerous.

It can mean that your retirement savings are being routed into less profitable portfolios.

Let me explain…

Let’s say a hypothetical scandal comes out that some higher-up at a major company is into cockfighting.

PETA and friends come out hooping and hollering that the major company is of the devil.

The PM joins in and condemns it publicly.

The mainstream press quickly taps into the growing sentiment with articles calling for KiwiSaver funds to drop the company from their portfolios.

So your KiwiSaver does just that…sells out.

But, despite the higher-up’s hobbies, the company is actually in good financial shape and turns a solid revenue year after year. As a result, the stock price skyrockets…and you’re left watching from the side-lines…missing out on tens of thousands of dollars in untapped gains.

All because of some tabloid story.

That’s the danger of having the media dictate how your retirement funds are allocated…

It’s also dangerous because there’s no logical end to which companies fall onto the blacklist.

Today, it’s weapons companies. But tomorrow it could be all companies that produce pollution…or manufacturers that use plastic…or businesses that serve alcohol at happy hour…or companies without 50%+ women on the board…or companies that played Michael Jackson in their elevators…whatever!

The list would never end.

The mainstream media could theoretically make or break any sector they wanted to…because fund managers have to respond to their every whim.

It’s a terrible way to do business…and an even worse way to manage other people’s money.

A much better (and more responsible) way is to tether one’s strategy to a key goal.

Maximising returns, for example. [openx slug=inpost]

Imagine if a KiwiSaver provider came out and said that their sole goal was to maximise their members’ long-term returns…even if it means filling the portfolio with gunmakers, cigar-rollers, or booze-brewers.

The mainstream wouldn’t like it…but some members might.

Maybe those members don’t like handing over their KiwiSaver contributions so some company can make themselves look good through feel-good PR stunts.

Instead, they might simply want to see a positive gain at the end of the year.

Now, that being said, perhaps you don’t fall in that camp.

Perhaps for you, returns come second…and altruism comes first. That’s fine. Admirable, even.

But is it the place of fund managers to make that decision for all of their clients?

Probably not.

Because while some people can afford to earn weaker returns in a more-restricted altruistic portfolio, others may need to squeeze every dollar out of their savings as possible…

Maybe they’re going to rely on KiwiSaver to help them pay rent and buy groceries…and every dollar counts.

So, instead of blanket strategies, I reckon fund managers should compartmentalise their offerings.

This fund focuses on returns (and includes any and all sectors).

That fund focuses on altruism (and excludes ‘sin stocks’).

Offer both. And let members choose.

I’m aware that some funds do this…but if you read through fund responses to the outcry over weapon-makers, you’ll find that they’re applying their altruistic filter over all of the funds, even the funds that ought to be focused on returns.

To me, that’s a violation of their fiduciary duty to act in the beneficiaries’ best interests.

Because while it makes the company look good in the public spotlight, it doesn’t do anything to help members’ return on investment.

At the same time, I do believe there’s an appropriate venue for investors like us to inject our values into the marketplace.

It’s called our stock portfolio.

In our own portfolios, where we buy or sell stocks directly, we’re free to pursue whatever strategy or altruistic goal our hearts desire.

Maybe I hate carrots…so I can decide not to invest in any company that has carrots on the menu.

No problem.

Or maybe you support clean energy…so you can restrict your positions to only companies that run off clean energy.

Completely your choice.

It’s truly one of the best perks of being a direct investor…that we can pick and choose the companies that fall in line with our unique individual weltanschauung — our beliefs.

It’s putting your money where your mouth is.

Which is also what KiwiSaver providers ought to be doing right now — by ignoring the mainstream claptrap and focussing on their clients’ best interests and not on their own street rep.

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: On a slightly separate issue, you’ll often find that these major funds will sponsor events and speakers to show off their altruism. A diversity summit, for example. Or a climate change gala. It’s the same thing, isn’t it? Companies trying to make themselves look good…at the cost of members (via fees). I say stop trying to play the PR game…and get back to doing what you’re supposed to do — managing investments.

PPS: Do you disagree? Maybe you think there’s a special place in hell for people like me? If that’s the case, I want to know. Let me have it at [email protected].


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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