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Energy boom poses challenge for ethical funds

So-called socially responsible investment funds eager for energy exposure must do a delicate balancing act, KEITH DAMSELL writes


With apologies to Kermit the Frog, it's not easy bein' green, especially when it comes to investing in the red-hot oil and gas sector.

The oil patch is driving the Toronto Stock Exchange to new heights this year, making life challenging for ethical or so-called socially responsible investment (SRI) funds. While fund managers want energy sector exposure, green principles can't be sacrificed for the sake of better returns.

"For SRI funds, it does prove to be quite a big problem . . . to be quite frank," said Andrew Preston, head of socially responsible investing at Aberdeen Asset Managers Ltd. The Scottish firm manages the Mackenzie Universal Sustainable Opportunities Capital Class Fund, a $10.8-million fund that's returned 17 per cent since Aberdeen took over the reins in June last year. The fund has a slender 3-per-cent energy weighting as many integrated oil producers fail to meet Aberdeen's screening, Mr. Preston said.

Social investors eager for energy exposure must do a delicate balancing act. For example, Michael Jantzi, founder and president of Jantzi Research Inc., uses a "best-in-class" approach that seeks out firms with the best practices across a range of criteria, including health and safety, human rights, climate change and renewable energy investment.

"We do not advocate eliminating all oil and gas companies from eligibility," Mr. Jantzi said. In the next few weeks, the firm will release a report comparing the SRI practices of nine Canadian energy firms with 14 international counterparts. "We believe that our analytical framework allows us to differentiate between companies that are doing a good job . . . and those that are not, knowing full well that there is no such thing as a perfect company," he said.

Research by Vancouver's Ethical Funds Co. indicates the bulk of Canadian oil and gas players fall comfortably in the middle of the SRI pack. Overseas giants such as Royal Dutch Shell PLC and BP PLC set the gold standard, making substantial investments in renewable energy and consulting extensively with local residents when developing new properties. In contrast, Ethical Funds shuns many U.S.-based oil and gas firms in part because of Washington's decision to opt out of the Kyoto protocol.

"Every industry has its challenges and it's our job to make sure we are invested in companies that are attempting to meet those challenges," said Jennifer Coulson, the company's senior sustainability analyst. Holdings in the flagship Ethical Growth Fund include Suncor Energy Inc., EnCana Corp., and Petro-Canada.

Tech indexing

"Whatever you do, don't buy an ETF [exchange-traded fund]. . . . You end up buying a fund that's populated, dominated by last-generation technology companies. You are in there for five years and you curse the fact that you only made 5 per cent relative in your fund while an actively managed tech fund, which is trying to get no exposure to those stocks and is entirely exposed to next-generation themes, is up about 50 per cent. . . . In tech, you just couldn't make a worse decision." -- Ben Rogoff of Polar Capital LLP. The London firm manages about $2.5-billion (U.S.), including the Mackenzie Universal World Science and Technology Capital Class Fund.

April fund sales

April proved to be a cruel month indeed for many in the fund industry.

Nine of 28 reporting companies were on the wrong side of the ledger last month, led by the fund unit of Bank of Nova Scotia. Scotia Securities Inc. reported $274-million in net redemptions, followed closely by AIM Funds Management Inc., losing $271-million in Trimark and AIM-branded business. Other notable firms on the losers' list include CIBC Asset Management, down $114-million, and, in a rare weak month, Phillips Hager & North Investment Management Ltd., off $15-million.

The fund arm of Royal Bank of Canada was, once again, the month's top seller, reporting $362-million in net sales. Industry giant IGM Financial Inc. was a distant second, reporting $145-million in net sales. Fidelity Investments Canada Ltd. and AGF Management Ltd. continued to notch up positive sales, reporting net sales of $13-million and $1.9-million respectively.

Expect year-over-year sales for the month to be flat. The Investment Funds Institute of Canada forecasts net April sales of between $300-million and $800-million, an average of about $550-million. In April, 2005, net sales totalled $567-million. Final data for the month are expected on May 15.

AGF shuffle

There is a changing of the guard under way at AGF Management.

Chief executive officer Blake Goldring will replace his father Warren as chairman. The elder Mr. Goldring, a fund industry pioneer who co-founded the company in 1957, becomes honorary chairman on June 20.

The real news for investors and fund unitholders, however, was buried in the fifth paragraph of the AGF May 3 press release. As of June 1, Randy Ambrosie will become president of subsidiary AGF Funds Inc. The well-regarded financial executive is largely responsible for the company's shift in fortunes. The new role adds oversight of the firm's international institutional business to Mr. Ambrosie's file.

Keith Damsell is editor of GlobeinvestorGOLD.

© 2007 The Globe and Mail. All rights reserved.

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