What's in a name?
With thanks to Stijn de Witt

What's in a name?

With a hat tip to the Bard, I found myself pondering the question, "What's in a name", in light of the Securities and Exchange Commissions' (SEC) "Names Rule". The new rule, effective December 11, 2023, seeks to make sure a mutual fund's name is reflective of what is in its investment portfolio. There is a certain amount of sense in that approach. Investors may use the fund's name to see if it could be a possible addition to their portfolio and thus the name needs to reflect the portfolio.

The original Names Rule stretches back to the Investment Act of 1940. In 1996, Congress amended the original 1940 provisions to authorize the Securities and Exchange Commission to define registered investment company names as “materially deceptive or misleading.” No quibbles from me. If a mutual fund is named, "US Large Cap Blend Equity", I would expect to see a variety of large cap companies, both growth and value, that are based in the United States. I would quite surprised to see emerging market high-yield bonds in this hypothetical investment.

Investors who are curious about whether an investment is adhering to its benchmark can look at the "R-squared" statistic. A high R-Squared number (ie, >80) indicates that the investment is investing in a similar manner to its index. But don't discount a fund just based on a low R-squared. It may be that the fund is overweight or underweight certain areas relative to the index. One statistic does not usually tell the whole story of an investment. Research and seeing the big picture are important.

The Names Rule makes sense when dealing with facts. Again, a US Large Cap Blend Equity fund is unlikely to have holdings in emerging market high-yield bonds. But the Names Rule becomes a bit problematic when it comes to the worlds of socially responsible/ green/ ESG/ sustainable investing. How exactly are those terms defined? Unlike "US Large Cap Blend Equity", there can be multiple definitions of sustainable investing. And each of these arenas might argue it is sustainable or just as sustainable as the others. Who decides?

For example, an investment focused on water solutions could fit one definition of sustainability. An investment that explores climate change solutions could also be seen as sustainable. And getting even more granular, is an investment focused on electric batteries and energy storage truly sustainable given how the batteries are made?

In 34 years in the industry, I have often likened sustainability to a mountain top. Many are trying to get to the mountain top but are coming at it from different sides of the mountain. It does not mean one solution or path is better than another but rather than there are multiple paths.

I was reflecting on this as I learned about one investment company dropping the word, "Sustainable" from the name of one of their investments. The company is concerned about how "sustainable" could be defined, whether that definition could shift based on who is political office, and if sustainability could be interpreted differently across regions. They did not want to run afoul of the SEC and so dropped the word, "sustainable" from the investment name.

I appreciate this company's prudent approach in not wanting SEC litigation and yet, I am frustrated that they did this. I think most folks would rather live on Earth than be on the first rocket ship to Mars (especially given what has happened with the last three test flights!). Finding sustainable solutions to the climate-change driven threats we are facing is imperative. I fear that the Names Rule could actually be a hindrance more than a help in this case. Your thoughts?

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Timothy R. Yee, AIF, CPFA?, C(k)P?, CHSA, NQPA, CSRIC?, RI(k)的更多文章

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