Larry Berman is co-founder of ETF Capital Management. He is a chartered market technician, a chartered financial analyst charterholder, and is a U.S.-registered commodity trading advisor.
Paul Tudor Jones, a prominent U.S. hedge fund manager who made his claim to fame calling and profiting from the 1987 stock market crash, is now putting his money behind a burgeoning sector: ethical investing.
Mr. Jones is backing a not-for-profit firm called JUST Capital, which ranks companies on how they treat their employees, customers and the communities they do business in. He believes that the C-suite has gone too far in embracing economist Milton Friedman's "profit-above-all-else" ethic, and they need to change how they do business, he told the Forbes Under 30 Summit in Boston last week.
Corporations have paid too much attention to prioritizing shareholders, and have ignored the average worker at a time when senior executives have never made more money, he said.
The median family income in the U.S. and in most developed markets, adjusted for inflation, has not meaningfully increased in 40 years. U.S. president Donald Trump won the election not because his policies were better than Hillary Clinton's (although that's what he will tweet you), but because the average person has fallen so far behind: The last time so few people held most of the wealth in the U.S. was in 1928.
Mr. Jones said: "One of the key things that always ends up tearing down great civilizations and countries is wealth disparity. It's not sustainable. The way wealth disparity has been historically dealt with is either wars, revolution or taxes. My guess is in the future it'll be one of those three in this country."
When Mr. Friedman wrote his article The Social Responsibility of Business Is to Increase Its Profits, in 1970, the maximum federal individual tax rate was 70 per cent, versus about 40 per cent today. The wealth gap was one-fifth of what it is today.
Mr. Friedman believed corporate executives should make as much money as possible while "conforming to the basic rules of the society." The economist also thought that if people want to do good in society, they should do so through personal charity rather than through the companies they manage, direct, or invest in.
But In recent years. we have seen a move by pension plans and foundations to invest more ethically. ESG (ethical, social, and governance) responsible investing is an investment tilt that is attracting an increasing number of eyeballs.
A pair of ETFs released in the past year rank companies by the fairness they show to women in senior management. Others exclude companies that use underaged workers and have human rights issues.
JUST ranks the 1,000 largest U.S. firms by ethical behaviour in its index. The top 100 companies will be able to label their products with a JUST seal and will be included in an exchange-traded fund to be started next year. Since 2000, those 100 companies have outperformed the S&P 500 index.
Technology companies lead the index, though companies from almost every other industry will be included. Employee surveys often see that the highest levels of satisfaction tend to be in the technology sector.
According to Mr. Jones, the index will highlight and begin a debate about what is the true purpose of a corporation.
"The companies of tomorrow are the ones that are paying their workers better, are the ones that are creating more jobs, are the ones that actually have more of a social conscience," he said.
In my company, we strive to make sure our customers and employees are well served and compensated at above-industry averages. If you want to serve your customers well, you need to have the best employees.
Ethical and socially responsible investing is an increasingly important aspect of longer-term investment themes and the trend is just beginning. I expect to see many more ETFs linked to ESG type investing in the coming years.
Personally, I don't like to exclude any potential investment option if it can add to returns or help diversify volatility of returns. One example in recent years would be to reduce, but not to eliminate, carbon emitters in portfolios.
A few years back there was an ETF linked to the iShares MSCI ACWI Low Carbon Target ETF. It largely excluded energy companies and high polluters, such as airlines and some mining companies. It did relatively well as those sectors saw their underlying asset prices fall. But as prices recovered last year, the ETF did poorly relative to the world index.
Another ETF comprises the performance of the top 250 socially responsible companies (SUSA-N). This selection over the past five years did worse that the total U.S. market index.
So while there have been successes in the sector there have also been investments that have not panned out as well. But there is no denying the ESG segment is on the rise, and more investors will be joining the likes of Mr. Jones.
My upcoming Berman's Call tour "Investor's guide to thriving" will help you learn how to incorporate some of these investment themes and properly diversify your portfolios. The key is to learn about correlation and diversification and it's impact on return and risk in your portfolio. You will learn how to identify what type of investor you are, and some techniques to improve how to manage your asset allocation so you can preserve and grow your portfolio.