Why This Investor Won't Ever Buy Banks or Insurers
Asset management is a realm where the word "opportunistic" describes a virtue, but not everyone in the business is in it for money alone. There is, in fact, a whole sector known as "socially responsible investing" or "impact investing," where activist shareholders try to change the behavior of ethically challenged industries, or simply boycott them altogether. There are lots of SRI funds that won't touch alcohol or gambling stocks, for example, no matter how profitable they are.
But banks and health insurers? For Finny Kuruvilla, who co-founded and co-manages the $28 million Eventide Gilead fund (symbol: ETGLX), both industries fall into the same ethical category that other SRI funds reserve for the likes of Big Tobacco. Kuruvilla says he has shunned both sectors since he began managing money informally in the 1990s for friends and family, and has stuck with the policy since launching Boston-based Eventide in July 2008.
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Given the global train wreck that too-big-to-fail banks were about to cause, that was not just good optics, but good strategy, boosting performance considerably, Kuruvilla says. Likewise with for-profit health insurers, whose tactics have drawn heightened scrutiny thanks to the acrimonious healthcare debate.
Eventide is not the only fund that categorically avoids too-big-to-fail banks--the Chicago-based Appleseed fund (APPLX) does likewise--but it seems to be alone in avoiding for-profit health insurers on ethical grounds alone. It also avoids the usual SRI suspects, like gambling stocks.
The fund marked its fourth anniversary July 1 up 35 percent since inception (a compounded 7.8 percent), compared with 5 percent for the S&P 500 over that period. It's a no-load fund, but its 1.67 percent expense ratio was well above the midcap category's 1.38 percent average last year, and has been since inception. That's due partly to a turnover rate that Morningstar puts at 487 percent for last year--more than six times the category average. Kuruvilla says it's about half that, and that Morningstar will revise the figure in coming months. "We will sell more frequently when we don't agree with company behavior," says Kuruvilla. "Second, we have a lot of biotech stocks that can rise [or] fall on events like FDA approval."
Like many SRI funds, Eventide is motivated partly by religious conviction. Kuruvilla is a member of the Mennonite church, whose internal systems of healthcare finance he regards as superior to the existing U.S. system or to the Affordable Care Act that the Supreme Court recently upheld.
Kuruvilla thinks the global investment boycott of Apartheid South Africa in the 1980s and the investment strategies of the environmental movement are examples of what activist investors can achieve. We spoke with him recently about his work at the intersection of ethics and investing. An edited transcript:
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Was there a particular event that compelled you to avoid for-profit health insurers?
It's something philosophically I've done since I started managing money in 1995. It's a deep-seated conviction that I've held for a long as I can remember. I was very informally helping people manage money--a friends-and-family type thing, and I would also avoid the sector.
And your objection to health insurers?
There are a few things. Their basic business model is built around what I would say is a perverse incentive: They try to collect money from those who have a lower probability of actually using healthcare, and then try to exclude people who actually do need the service so they can maximize profits. That basic business model is something that I just don't feel very good about. The fundamental business model is just fraught with ethical problems.
Why should there be this middle-man who makes millions of dollars when you can, in fact, set up something like a direct model, where individuals are effectively cutting out the middle man and working one with another? It think that's a very exciting model, and it's something I've personally seen work really well.
But that sort of system would deprive you of certain investment opportunities.
That's OK. I'm all for missing a business opportunity if it's built on a business model that's predatory or unethical. Call me old-fashioned, but I do think there's something very powerful about a small community where you can have that level of interaction.
And your objection to big banks?
The basic problem I have with the too-big-to-fail banks is that they're not fundamentally value-creating. Their basic mandate is to make money no matter what the market conditions, no matter what it takes to sell a security, or what it takes to do a particular type of trade. Everyone is talking about this JP Morgan London Whale trade. If you think about it, what was that? It was basically something that was 100 percent profit-driven, betting with some highly speculative instrument that added no redeeming value whatsoever to the world. I'm not opposed to profits, but profits should be the byproduct of value-creating activity. The minute you begin to say "I'm going to make a profit at any cost"--exactly the business model of tobacco and gambling--your customer becomes someone you're exploiting.
Some would argue that, greedy as they appear, they're assuming risk in ways that allow other people to create wealth.
And I actually think that part of what they do is OK. For example, helping companies raise money to go public. But when it becomes something like this London Whale trade or pushing loans on those who really can't afford them, securitizing loans and creating instruments that were layering derivative upon derivative, there comes a point where those types of activities are not harmonious with value creation. How is it possible that in 2012, after all the pain of this financial crisis, that people are still doing this sort of thing? It's mind-boggling.
Maybe game theory explains it: There's a dominant strategy that demands pursuing every opportunity to some practical limit, no matter what the risk.
I'm all in favor of taking risks. Risk is the lifeblood of an economy. But there's a big difference between risk-taking for the sake of making money and risk-taking for the sake of some productive activity.
Have you gotten criticism from shareholders for avoiding either sector?
Most people, because they know our convictions, are already sympathetic to our approach, so we tend not to get a lot of pushback on that. Probably the general population would be not with us there. But we were pretty upfront in advertising who we are. People know that if you come to us, you're signing up for this investment philosophy.
How do you answer the argument that if you really want to change corporate behavior, you're better off engaging than walking away?
We want shareholders to communicate their wishes for how a company should be run, but at the same time, one has to be pragmatic and realistic. If I'm going to own Goldman Sachs or one of these too-big-to-fail banks, the likelihood that other shareholders will have similar convictions is very small, and so the likelihood that we will make any sort of impact is almost zero. You might say that sounds negative, but I believe the way you can make an impact instead is, we get more and more shareholders and get bigger, and the share price at the competing [banks] that have values-based models will do better, and it will cause alarm for those who are participating in the too-big-to-fail banks. They'll want to change their business models.
