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Uncertain times call for long term, responsible investing


Gary Hawton, CEO of Meritas Mutual Funds Inc.

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Read more about Meritas in the Dec. 2-08 Financial Post

November 28, 2008
- Deborah Froese

WINNIPEG, Manitoba — The recent debt crisis and resulting economic uncertainty are troubling many people – especially those who are already drawing down their pension investments.

But for Gary Hawton, CEO of Meritas Mutual Funds Inc., the returns on investment are not the only measure of value. Socially Responsible Investing (SRI) builds the Kingdom of God by selecting investments based on environmental, social and governance (ESG) standards that support people and God’s creation.

Despite the market downturn, Hawton and his wife have not been closely scrutinizing their own investments. “I don’t want that to sound as if I don’t care and I don’t want it to sound callous as if we have so much money that it doesn’t matter. But we know that God has entrusted that money to us as his stewards. We believe that we are stewarding it correctly and efficiently.” Hawton alludes to the Jesus’ parable of the talents in Matthew 25:14-30; even if the financial value of their investments is decreasing, he and his wife have not buried their money under a tree; they have put it toward greater social and environmental good. “We think that that is what we’re called to do.”

He admits that in the short term, responsible investing may have a financial cost, but it doesn’t mean that SRI is a losing financial venture. To the end of October, Meritas Mutual Funds experienced 79 straight months of positive sales, meaning more money was coming in than going out.

Additionally, the Jantzi Social Index (JSI), a Canadian firm that measures the financial returns of 60 SRI stocks, has reported favourable results compared to the standard investments tracked by the Standard and Poor/Toronto Stock Exchange 60 (S&P/TSX 60) after which the JSI is modeled. During the month of October the S&P/TSX Composite Index and the S&P/TSX 60 Index lost 16.67% and 16.15% respectively, while the JSI had a slightly slower rate of decline at 14.11% during the same period. From its inception on January 1, 2000 through October 31, 2008, the JSI achieved an annualized return of 4.06%, while the S&P/TSX Composite and the S&P/TSX 60 had annualized returns of 3.69% and 3.98% respectively, over the same period.

Hawton has spent more than 20 years in the financial industry and says he can draw some loose parallels between the situation now and other events – the crash of 1987, for example. “Two years later, the market was back up to where it was.”

He refers as well to the 1997-1998 Asian crisis. Asian countries had become reliant upon debt. Markets were climbing vigorously – and then the Asian debt bubble burst. “The contagion affected everyone around the world and eventually made its way to North America. Our markets dropped significantly during that time period. And about two years later, the markets recovered back to where they were.”

The current debt crisis began in North America and spread around the world. Markets fell and the global economy collapsed. “I’m not predicting that in two years we’ll make it all back,” Hawton says, “but if you go back and you look at a chart of what happens in the stock market, these healthy corrections happen every once in while.”

“It’s time to measure value in different ways,” Hawton says, “but how to do that is a good question.” He proposes quantifying customer satisfaction and employee satisfaction, understanding these two factors are necessary for businesses to be profitable. That means taking care of people is a financial plus.

SRI objectives have long-term goals. Rick Braun-Janzen, Assistant Manager of Mennonite Foundation of Canada which is a part owner of Meritas Mutual Funds, says that had companies taken a more long-term view of sustainable growth, some of the current problems might have been avoided.

However, he notes that the long term horizon is not unique to SRI investors. “It’s something that you get from the Warren Buffets out there as well. He [Buffet] is not necessarily an SRI guru, but he definitely advocates buying good companies and holding them for a long term.”

Changes are already occurring within the financial system, according to Hawton. People or businesses who qualified for loans before will no longer qualify. Interest rates below prime are not viable. “Borrowing is going to get harder – and that’s good. We have become a nation of debtors and we need to wean ourselves.”

Meritas calls for transparency

Meritas Mutual Funds is pursuing transparency in governance. On October 24, 2008, the company filed a shareholder proposal to eight Canadian companies asking that shareholders have the opportunity to advise boards on salaries for top executives. The non-binding “say on pay” shareholder advisory vote included Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce (CIBC), Nortel Networks, Royal Bank of Canada, Sun Life Financial, Toronto-Dominion Bank and the TSX Group, which operates the Toronto stock exchange and Montreal futures exchange.

A similar proposal placed before the same companies in 2007 was supported by an average shareholder vote of 40.5% - and as high as 45% at CIBC.

“Forty-five percent is huge,” Hawton says. “Most shareholder proposals get a five to seven percent vote.” He reports that both he and the banks were surprised by the strong support the proposal received. He expects the 2008 results will be even more favourable.

Although implementing the proposal would give shareholders only an advisory role in establishing remuneration for executives, Hawton believes it could still have a significant impact on what executives are paid. “Let’s say we get 51% somewhere. The board would have to be completely unresponsive to the wishes of shareholders – even thought it’s advisory – to say we don’t care. I don’t think it needs to be binding.”