A good cry

  By Guest Blogger Doug Rowat

There may not be a more depressing songwriter in the world than Sarah McLachlan. My wife jokingly suggests that her songs should be accompanied by a crisis-hotline number each time they’re played on the radio.

Yet, when you combine one of her wrenching, emotional ballads with images of an injured puppy in a SPCA commercial? My god. It takes actual willpower not to reach for your credit card. McLachlan herself admits that she can’t handle the ads either, but also doesn’t deny their effectiveness, noting a few years ago that they helped the SPCA raise more than $30 million. As she puts it, “It worked like a hot damn.” There’s no denying it: if you want people to give you money, make ‘em cry a little.

There are parallels, of course, between those pull-at-your-heart-strings commercials and emotion-driven investment decisions. Witnessing a social malady, reacting emotionally and then impulsively throwing money at the problem happens constantly with our investment choices. And because these decisions are emotion-based, not fact-based, the outcome isn’t always favourable.

Take cancer. (How’s that for an abrupt turn.) According to The Institute for Health Metrics and Evaluation, an independent health research centre at the University of Washington, in 2016, there were 17.2 million cancer cases worldwide and 8.9 million deaths. Cancer cases increased by 28% between 2006 and 2016. Mainly because of an ageing global population, these numbers will, in all likelihood, continue to grow dramatically.

Obviously, these are frightening statistics and, as a result, they carry a lot of emotional heft. They also imply that investing in the cancer-treatment space is a no-brainer. Further, on a personal level, who doesn’t know someone who has battled cancer? Therefore an impulsive investment decision might have been made to put some money into the Loncar Cancer Immunotherapy ETF (CNCR) when it was released in 2015. Loncar focusses on small-cap companies that develop therapies to treat cancer. However, in part because of concentration risk (there are only 26 holdings in this ETF), CNCR has dramatically underperformed the simple, broad-based S&P 500 Health Care Index since inception (see chart). In other words, by wanting to do some good with your investments, you might not have carefully considered all the investment risks. The end result? Your heart was in the right place, but you didn’t make any money.

Loncar Cancer Immunotheray ETF (white line) since-inception performance vs S&P 500 Health Care Index (orange)

Source: Bloomberg

When the BP oil-spill disaster dominated the news in 2010 and five million barrels of oil spewed into the Gulf Coast waters over the span of four agonizing months, creating one of the worst environmental disasters in history, I received many calls from investors wanting to purchase solar and renewable energy ETFs. Mainly, these investors were simply angry and frustrated with BP and, as a result, their investment decisions weren’t carefully thought out.

As proof, the Invesco Solar and iShares Global Clean Energy ETFs have performed terribly since April 21, 2010—literally the morning after the Deepwater Horizon explosion and, ostensibly, the best time to buy clean energy and the worst time to buy BP and the oil sector in general. But the ultimate irony? BP has gained 35% on a total return basis since this date and the S&P 500 Energy Index, which is loaded with all those nasty oil companies, is up a similar amount. The clean energy and solar ETFs? Sharply negative returns across the board. You might have felt better about yourself for trying to save the environment, but your portfolio definitely wasn’t saved.

BP (white line) and S&P 500 Energy Index (orange) vs select clean energy ETFs (red & yellow) since 2010 Deepwater Horizon explosion

Source: Bloomberg

Now, some socially responsible ETFs have performed just fine long term; however, it’s important to make sure that the decision to invest in these products, particularly the niche ones, is being made objectively, unclouded by emotion and that all the risks are considered.

There’s nothing wrong with wanting to do good for the world, but many socially responsible investments are simply money pits.

And you can trust my advice on this. You’re in the arms of an angel.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.