Bank of Montreal’s notes linked to Ameriprise SRI equity focus list elicit buysider objections

By Emma Trincal

New York, June 9 – Bank of Montreal’s upcoming notes linked to a basket of sustainable and socially responsible stocks selected by Ameriprise Financial Services, Inc. face skepticism from some financial advisers.

The 0% notes due July 8, 2016 are linked to 14 common stocks selected by Ameriprise’s investment research group for its sustainable and responsible investing equity focus list. They will pay at maturity par of $1,000 plus the basket return with a breakeven level of 100.9%, according to a 424B2 filing with the Securities and Exchange Commission.

The issue price of the notes is $1,009 per $1,000 principal amount of the notes.

Basket picks

“Socially responsible investing is a growing trend, and you already have quite a few well-known mutual funds and ETFs gravitating around this,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

But he objects to the basket constituents selected by Ameriprise.

“That is not the traditional definition of SRI at all,” he said.

The acronym SRI stands for socially responsible investing.

“SRI is about investors who are buying to better society, like for instance providing clean energy. Or it’s about religious-based investments like the Ave Maria Funds, which would eliminate pornography for instance,” he said.

“Sometimes it’s just no vice. No gambling, no sex, no drugs, no tobacco. All the vices of the world you can check this off.

“I know it’s hard to define SRI, but when I look at those picks, I’m a bit puzzled.”

The 14 reference shares are Apple Inc., ACE Ltd., Bank of America Corp., Costco Wholesale Corp., Walt Disney Co., Ford Motor Co., Johnson & Johnson, Kimberly-Clark Corp., Coca-Cola Co., Kroger Co., Starbucks Corp., Waste Management, Inc., WhiteWave Foods Co. and Xylem Inc.

“Apple? They’re socially responsible because they sell cell phones all over the world? That’s not being socially responsible,” he said.

“And Ford? How is that socially responsible? They’re poisoning the atmosphere with cars!

“Johnson & Johnson I understand a little bit better. It’s still grey, but they do a lot of projects for the Third World.

“But Bank of America? I have nothing against banks. Banks are a necessarily evil. But I don’t think people are going to buy it if you tell them banks are socially responsible.”

Screening process

Kunhardt brought up a second objection: the screening process behind the selection of socially responsible companies, which he said lacked details.

The prospectus in its paragraph on sustainable and responsible investing gave the following information: “Ameriprise Financial’s investment research group defines sustainable and responsible investing as an investment strategy that seeks to combine investor values with performance-enhancing characteristics gained from the identification and analysis of environmental, social and governance information.”

In addition, the prospectus said that management teams of companies meeting those criteria “may be able to better manage risks and generate competitive advantages.”

“It’s way too vague,” said Kunhardt.

“We don’t know anything about their SRI screens.

“I think this comes from their marketing department, honestly. But if you want to market your product as being socially responsible, you make a clearer definition.”

Value

Cost is also an issue.

“If it’s really what you want to do, you can find an SRI fund that’s truly responsible. Take Calvert Investments. There are plenty of mutual funds with solid track records you can use,” he said.

“I guess I should say OK ... this is a fairly inexpensive note. Ninety basis points. It’s not bad.

“But what’s the point of the note? What does the structure give me? I have a one-year note. I have no downside protection. No leverage. It’s a one-to-one.

“I can go to Calvert fund and get the same thing. Or I can buy those stocks right out.

“I don’t see anything that would encourage me to take the investment. I’m just adding a fee to hold this basket of stocks for a year.”

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, agrees. He also pointed to cheaper alternatives.

“I don’t see any reason why you would even consider something like this,” he said.

“I could just buy a socially responsible ETF at a fraction of the cost. It would be cheaper and more diversified.

“And if I really wanted that list of 14 stocks and buy them at $5 to $10 a trade, I could get them all for under $140.

“You’re talking blue chips. These are large caps anybody can buy.”

Whether the stocks were selected by Ameriprise or a top-tier investment bank makes little difference, he said.

“They’re going to be biased anyway. I don’t hold a lot of weight on the stock picks of investment banks or brokers. They sell stocks. That’s what they do.”

Show me the money

On a deeper level, those buysiders are skeptical of the benefits of socially responsible investing as a money-making strategy.

“It’s OK not to buy the stock of a company you don’t like. But don’t think that because you buy or don’t buy them you are benefiting them or detracting them. The company doesn’t know that you bought or sold the stocks,” said Chisholm.

“I can understand people not wanting to benefit from things they don’t agree with. It’s fine. You don’t have to. There are plenty of investments you don’t have to invest in.

“But the idea of creating an investment or a fund based on the elimination of certain names or sectors to me is a limitation. Take the so-called ‘vice’ investments: drinking, smoking and gambling. These tend to do well in a recession. Get rid of them and you’ll miss on some of the best recession-proof performers.

“You’re limiting your investable universe. You’re limiting your chances and opportunities.

“Separating your personal feelings from your investments I think is the way to go.”

Calls to Ameriprise and Bank of Montreal were not returned by press time.

The notes will price on June 25 and settle on June 30.

BMO Capital Markets Corp. is the agent.

The Cusip number is 06366RP82.

© 2015 Prospect News.
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