The people have spoken – no more KiwiSaver money for clusterbombs

by Pattrick Smellie / 04 November, 2016

New Zealanders were appalled – and now international hedge fund Vanguard offers an option that excludes cluster munitions, tobacco and nuclear industries.

In an age where so many people feel powerless that a proto-fascist despot like Donald Trump has stepped into the White House, it’s all too tempting to think that “people power” no longer counts for much.

But occasionally, there’s an antidote.

One current example: international hedge fund Vanguard – provider of global share index-tracking funds to a majority of New Zealand’s KiwiSaver providers – acted swiftly to create a new fund that excludes cluster munitions, tobacco and nuclear industry investments from its portfolio.

Their reaction was part of the growing global phenomenon for the providers of investment services to try to match their customers’ increasingly nuanced requirements.

Everyone who’s saving for retirement wants the best possible returns to fund a comfortable life after work, but very few would wear investment in the deaths of civilians because of landmines or smoking as a badge of honour while doing so.

So when RNZ first broke the dirty secret that the funds management industry had known for years – that when you track global share indices, you’ll inevitably have some bad eggs in your basket – consumer reaction was massive.

Many New Zealanders, who’d never invested in anything other than a house before KiwiSaver started seven years ago, had no idea this was happening and were rightly appalled.

Cluster munitions, after all, are subject to international sanctions against their use. Investing in a company that makes them, however tangentially or unwittingly, doesn’t make it acceptable. If anything, it felt like deception to many.

Of course, much of that coverage has lacked context. None of these KiwiSaver providers had set out to find a nice cluster-bomb manufacturer to profit from. Rather, they have invested by proxy in these and a host of other companies by placing savers’ money in managed funds that track whole markets.

Many, for example, invest by tracking the MSCI world index – a benchmark measure that includes more than 1600 stocks in 23 countries. Its purpose is to give investors a balanced exposure to whatever is happening to global stocks, at low cost.

The new Vanguard International Shares Select Exclusions Index Fund excludes Philip Morris International, British American Tobacco, Lockheed Martin Corp, BAE Systems and Boeing.

The outcry in New Zealand “probably prompted us to bring forward the product development to this year as opposed to next year”, says Robin Bowerman, head of market strategy at Vanguard Investments Australia. “But there is a global discussion about this, there’s a global context to this, and then there was the local New Zealand concerns around the default KiwiSaver products.

For new KiwiSaver entrant Simplicity, the timing of the negative publicity couldn’t have been worse, since founder Sam Stubbs had made much of the fact he is using Vanguard – an international funds manager handling more than US$5 trillion in investments for savers all over the globe – to keep Simplicity’s fees low.

A cynic might have suspected some dirty pool to muddy the waters for Stubbs’s disruptive offering. Vanguard was hardly a household name until he started making it one, and his low-fee offer is a threat to the comfortable banking industry stitch-up that currently controls most KiwiSaver accounts.

In the end, however, Stubbs has arguably turned the newly announced Vanguard fund to his advantage, making sure he was heavily quoted in news reports about its creation and positioning Simplicity as one of those to champion a more ethical fund being created.

However, KiwiSaver providers also know this is just the thin of the wedge.

The Vanguard announcement followed by days the NZ Superannuation Fund’s announcement it would start divesting assets that are threatened by climate change, prompting a swathe of calls for its complete divestment from fossil fuels.

Ironically, excluding munitions, tobacco and nuclear energy slightly tilts the new Vanguard fund more heavily towards energy stocks.

Stubbs says, “It’s too early to be saying, ‘We won’t be investing in oil companies.’ It’s not just emissions from tailpipes, it’s plastics and a whole load of businesses. Start excluding fossil fuels and that creates major distortions” in the balance of global share indices.

Excluding them would have two main outcomes: potentially lower returns while fossil fuels continue to be such a large part of the global energy mix – most KiwiSaver accountholders still drive cars after all – but excluding a much wider range of investments may also affect the low fees that Vanguard and fund managers like them can achieve with simple, catch-all products.

At some point, individuals may have to choose higher-cost schemes if they want to guarantee the exclusion of industries they abhor.

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