Do ESG investments outperform? One investor says ‘no way’

For a different take on environmental, social, and governance-based investing, or ESG, we spoke with Vanguard investor Dan Wiener, who publishes a monthly newsletter on all things Vanguard.

Wiener takes a dim view of ESG. That's largely due to under-performance over a long period of time, he said.

"Over time, ESG and SRI [socially responsible investing] strategies have not proven to be performance winners," Wiener contends. "They may allow their investors to sleep better at night from a social-conscience point of view, but they aren't going to put more money in your pocket, they aren't going to give you more money to direct towards the social, environmental, or governmental issues that matter most to you, and they haven't had much of an impact, if any, on corporate-governance practices."

Plus, one investor's definition of what makes an investment ESG-worthy might make another recoil, he adds.

Let's take Vanguard's own Vanguard Social Index (symbol: VFTSX), which has been around since May 2000, longer than many exchange-traded funds and mutual funds in this category. Since 2000, the fund has lost ground to the tune of 1.0 percent per year when matched against the S&P 500 Index. Vanguard Social Index did claw back some losses since the latter months of the 2008 bear market, due to heavier stakes in technology and health-care stocks.

His may not be a popular stance, "but when it comes to an exclusionary index approach that removes 'bad' companies, like Social Index's benchmark FTSE index, I am skeptical that you are doing good. I also don't like your chances of outperforming the broad market," Wiener said.

Why? He believes negative screens — avoiding certain stocks — don't motivate public companies to change.

"When you sell a stock — say, ExxonMobil — because you don't want to own fossil-fuel-related companies, someone else is on the other side of that trade buying ExxonMobil. Exxon's board or CEO doesn't give a hoot that you sold your shares, because some other investors took your place. Plus, when a company like Wells Fargo is among the 10 largest holdings in Social Index, you could argue that the fund fails on the very first social pillar of 'do no harm,' " he said.

We've profiled local investors Jason Ingle at Closed Loop Capital and Sister Nora Nash, who argue in favor of ESG and put money on their beliefs. But Wiener presents another view as chairman and chief executive officer of Adviser Investments, an investment advisory firm, and editor of the Independent Adviser for Vanguard Investors.

Separately, investors who want exposure to foreign markets have an easy choice, he said.

Wiener recommends choosing Vanguard International Growth (VWIGX) for overseas equity exposure over Vanguard International Value (symbol: VTRIX) mutual fund.

Although International Value has been "a bit of a multi-manager mess, it hasn't been an unmitigated disaster," he said, and has outperformed Vanguard's Total International Stock Index since the index fund's 1996 inception, 239.9 percent vs. 191.1 percent. But Vanguard International Growth's 335.2 percent return over the same period is much better.

"My bottom line is that after 35 years, International Value isn't a bad fund, but it also isn't the best active international fund in Vanguard's stable. Yes, there will be periods when International Value outperforms International Growth. I'm not smart enough to know when those stretches will come, but I expect the growth fund will outperform over the long run. That's why International Growth has been a staple in our model portfolios. And, of course, I have my own money invested there, as well."

Are you planning to receive Social Security retirement benefits? Do you have questions about eligibility, when to collect, and the application process? If so, this free session is for you. Come get answers to all your questions on Thursday at Temple University Center City, 1515 Market St., Room 222. Photo ID is required to enter the building. Register for either session: 9 to 10:30 a.m. or noon to 1:30 p.m.

Sponsored by the Social Security Administration and Temple Center City, this free seminar is open to the public but registration is required by Monday.

To register, send an email to edward.lafferty@ssa.gov or call 866-398-3469, extension 29305.

Senior staff from the Securities and Exchange Commission will visit Philadelphia on July 17, and host an investor round table at the SEC's Philadelphia regional office from 11 a.m. to noon. It is at 1617 John F. Kennedy Boulevard, in Center City. Register via email: Outreach@sec.gov. For questions, contact Suzanne McGovern from the SEC's Office of Investor Education and Advocacy at mcgoverns@sec.gov.