ESG investing you say?

Lately, environmentally friendly investing has been growing in popularity, with every large investment house under the sun rolling out their version of eco-friendly investing. This has been in response to the large rise in interest in ESG, with assets growing by the billions annually.

Further, most institutions expect ESG to continue to grow, and at an accelerating rate.

But, as this FT article (subscription required) points out so well, all is not truthful when it comes to the real holdings of these so-called ESG funds.

The article specifically mentions that the JPMorgan ESG Bond fund holds Saudi Aramco debt, which under no reasonable circumstances can be considered and environmentally or socially conscious. This is one example of many where the name of and marketing of a product do not match up with the reality being delivered.

Take the JPMorgan Intrepid Sustainable Equity Fund , which “looks for companies that thoughtfully approach environmental, social and governance issues with attractive value, quality and momentum characteristics “, as an example. It owns Baker Hughes, National Oilwell Varco, Conoco Phillips, and Valero to name a few. These are all companies that are engaged in oil and gas drilling and development, not exactly at “thoughtful approach” to environmental issues.

Or take the Baywood Socially Responsible Fund , which ” seeks to achieve long-term capital growth by investing in undervalued equity securities while meeting our clients’ environmental, social, and governance screening criteria. ” It owns Schlumberger, Devon Energy and Centennial Resource Development, which is a pure play West-Texas oil producer. Again, makes you wonder what environmental screening criteria they are using that ends up with pure oil extraction being an acceptable investment.

These examples only cover the energy sector, leaving out defense contracting, gun manufacturing, mining, logging and so many more. The point is that it is quite tough, without deep research, to find funds and investments that are truly environmentally responsible, let alone responsible on the social and governance fronts. When you look across the current ESG universe of funds, this problem marketing not matching stock selection is wide spread.

What is the rationale behind thee allocation decisions? My suspicion is that these investment funds are deeply concerned about delivering index-like returns to investors on a year-in, year-out basis. They believe, and I think they are right about this, that most investors want fund returns that look a lot like the index. Advisors like this type of return as well, as it is a whole lot easier to justify investing in something that has returns similar to your favorite index, instead of a fund that is more decoupled from traditional indices. These factors mean that the ESG space will likely continue to give lip service to investing in an environmentally friendly way, whilst trying their best to give investors index-like returns.

Investors should understand that investing in a product that seeks to be different than the larger stock market means the returns they see will also be different than the broader stock market. This doesn’t mean returns will be lower, just that returns will not be in sync with the S&P on a yearly basis.

So, what’s an environmentally concerned investor supposed to do when finding truly ESG funds is so hard? Honestly, either take a huge amount of their own time to research this stuff for themselves or talk to an investment professional that specializes in finding or building portfolios that are more truly ESG.

Nathan Wallace

Let’s slow down financial decision making

Financial media would have you believe that world-shaking financial events are happening multiple times a day, and that we should all be glued to our screens lest we miss their commentary on the next Musk tweet or Bitcoin boom or bust. We are buffeted by the never ending news cycle meant to maximize ad revenues for major media companies.

While the firms that handle stock trading love this day-trading mentality, and it can feel pretty darn satisfying, let me offer an alternative. Slow down.

Be deliberate in making an investment plan. The whole world isn’t likely to change if it takes a few days or weeks to understand your risk tolerance, where your investment priorities lie, your investment horizon, and other factors.

Once you’ve made a plan that works for you stick to it, and resist making changes unless:

  1. Your investment mix becomes out of line with your plan
  2. Your life situation changes and thus your plan needs to change
  3. Global economies and markets have shifted enough that a change in strategy is warranted

Each of these three areas tend to change pretty slowly, but being aware of each is key. The trickiest item for most investors will be item three. The lions share of market moves are just noise, and deeper structural changes don’t come along too often, but when they do they necessitate changes in investment plans.

Item three is also where financial advisors can play an important role. They can serve as both an advisor on the planning side and a bulwark against overly reactive or panicked decision making. It’s hard to watch investments go down and sit idly, but having the fortitude to do so is often the optimal choice.


Your financial advisor is probably ripping you off…

Maybe not actually, but at the very least you are probably paying more than you should for financial advice. A Bloomberg piece recently covered a study looking at the median fees paid by individuals for advisory services. The study, conducted by Inside Information, looked at both fund and advisor fees individually and the combined total individuals are paying for financial advice. The results, shown below, speak to a financial industry where the good of  the client is secondary to profit motive.

The difference between paying 1.85% and 1.2% adds up to be huge over time, not even to mention the difference if your all in fees are nearer .6%. Assuming you invested $100,000 for 40 years with a 5% annual return, the difference between paying 1.85% and 1.2% ends up being  $100,790. That’s a huge hit. It gets worse if you lower the fees to .6%. If you paid .6% annually, in the simple model, you’d end up with  $553,384, a difference of $219,817 from the highest fee bracket quoted in the study.

This is not to suggest that investment advisors aren’t worth the money, at the right fee level they most certainly are, but rather that fees make an enormous in the long term prospects of an individuals portfolio and wealth. A quality advisor helps clients in myriad ways, and serve as a psychological buffer when the markets get tough.

There is good news though. On both fronts, advisor fees and funds fees, prices are coming down and should continue to do so. The shift toward indexing has reduced the fund fee burden for most investors significantly, and much like hedge-fund fees, advisor fees have also felt pressure from new and different models of providing financial advice. Individuals need to be prepared to grill a potential advisor about the underlying securities they suggest, since those fees often fly under the radar and can do as much damage as the advisors fee.

Greyfox Investors is committed to providing top tier service and advice at a reasonable cost. We endeavor to form lasting partnerships with our clients, not transactional relationships. If you are interested in learning more email

Great Piece on Financial Journalism

It is always important to remember that the financial media are exactly what they sound like, media. They are not fiduciaries, advisors or necessarily experts in finance; they are, however, entertainers who make their wages by getting page views…

Diversification and Hindsight

Corey Hoffstein at the Newfound Research Blog recently posted a great article on diversified investing.

Diversification Will Always Disappoint

The key takeaway from my perspective is the acknowledgement that investing in a diversified portfolio can be hard emotionally. When you look at the past performance of a properly diversified allocation the performance you see will always pale in comparison to other investments you could have made (you could have just bought apple on the IPO and enjoyed your 16,000% return…). The challenge, then, for advisors is to articulate to clients why being diversified, even if it makes you feel disappointed when you look at past returns, is most often the prudent course of action.

Of late this has been quite a challenge as US stocks have so thoroughly outperformed other countries that selling a globally diversified strategy has been tougher than usual.


Despite this we know that the out-performance of one asset class does not persist in perpetuity, and even if it is painful investing in a diversified portfolio is our best hope of long term returns.


Nathan Wallace


Great piece by John Oliver on the retirement industry

This piece by John Oliver is amazing and sums up, in a much more entertaining way, my views on the current state of the retirement industry. John echoes many of my core values of investing for clients; reasonable advisory fees, low fee funds, honest and transparent process, and most importantly avoiding all the b.s. that is endemic to our industry.

Warning: video contains strong language.



Nathan Wallace