Have you heard of ESG investing? I'm sure you have. It's the latest in a long series of tricks that the fund management industry has conjured up to avoid their funds' performance being compared on a like-for-like basis. Oh, I'm sure that you are surprised, maybe even shocked, at what you must be taking as inexcusable cynicism about something that will surely do so much good in the world. Let's step back and see exactly what the problem is here. There is no doubt that businesses and individuals must conduct themselves in a manner that follows the ultimate goals of protecting the environment and, further societal goals.
However, what we are actually ending up with (predictably, I would say) is a new self-appointed bureaucracy that has staked a claim to being able to evaluate businesses on whether they are following these lofty goals or not. What's worse is - and this is my real concern here - the fund management industry is beginning to start adopting ESG measures as investment criteria. Isn't that a good thing, you might ask?
Well, it sounds like a good thing, but pardon my scepticism here, it smells of just another way to make your fund performance hard to measure against any benchmark or a peer set. Over the past two decades, I've seen too many new-fangled, supposedly innovative investing themes which have been dreamt up for this exact purpose.
This was brought home to me the other day when I realised that one of the oldest equity funds in India had now become an ESG fund. This fund was founded in 1990 and is useful for looking at the long-term returns generated by a general, large-cap equity fund. However, after three decades, it has now taken on the garb of an ESG fund. The history will gradually become irrelevant, and any meaningful comparability with similar funds will become impossible. I don't mean to pick on this fund specifically but rather make the point about all ten or so ESG funds that now exist in India. There's a whole new industry on the way. There are ESG indexes, ESG rating agencies and ESG consultants. I'm fine with all that, everyone needs to make money, and new businesses get invented all the time. If you want to learn more about what is going on here, just google the term 'greenwashing'. It's a close relative of whitewashing.
However, mutual fund investors should look at all this with a sceptical eye and understand the motivations clearly. Fund companies like to invent themes to confuse customers and make it easier to sell mediocre funds. Basic marketing wisdom dictates that the sellers try and differentiate their products as much as possible. Therefore, fund companies typically describe the investment approach of their funds as being unique. This is an attempt to de-commoditise the fund - the fund company is now able to claim that the fund should be evaluated only by its own declared characteristics and not by comparing it to any other fund.
As far as you - the investor - is concerned, there is no need for any fund company to have more than five funds. These should be one conservative and one adventurous equity fund, one liquid fund, one income fund and one equity-income hybrid. There can be tax-saving variants of the equity and hybrid funds, but all of the investors' needs can be taken care of by these five types. The actual fund category names can vary with regulatory requirements, but these types of mutual funds can fulfil all actual savings and investment needs of any individual investor.
This sounds like a radical plan, but actually, it's only something radically simple like this that makes mutual funds fully understandable to the average investor and ensures that your savings needs are met in a predictable and understandable manner, unaffected by the current fashions in the business world.
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