‘Human-rights fund’ sets up as a classic stinker

No one speaks out in favor of atrocities and against human rights.

When it comes to the new ishares Human Rights Index fund, however, the concept is the atrocity and needs to be cried out against.

No one would suggest that it’s a great investment strategy to buy stock in companies that “have economic associations with countries or regimes that are implicated in … serious human rights violations.” While this new exchange-traded fund— registered with the U.S. Securities and Exchange Commission this month— has a noble purpose, execution makes it one of the most ridiculous ideas ever turned into a mutual fund.

Pinning that label on a fund before it has ever accepted a dollar from investors— and without regard to its performance— may seem harsh, but ishares Human Rights Index bears all the hallmarks of badly executed concepts that have landed in the Mutual Fund Hall of Shame.

For proof, let’s look at the new fund’s issues and compare them to some classic stinkers.

The ishares ETF screens the MSCI AllCountry World Index to weed out countries or companies that can be tied to human-rights violations “including, but not limited to, acts that result in widespread death, torture, rape, slavery, forced labor, and forced displacement of communities. In addition, companies with substantial economic associations with repressive regimes with poor human rights records, such as Sudan, Iran and Burma, are excluded.”

The screens leave the fund with more than 8,900 stocks in 42 countries, according to its registration statement. Since the All-country index covers 45 countries and over 9,000 stocks, the human-rights agenda has only eliminated three nations and about 3 percent of the possible securities.

It’s not like you’ll find a lot of global funds with significant allocations to Sudan, Iran and the nation that officially goes by Myanmar. (You won’t find many funds with big chunks dedicated to Afghanistan, Pakistan or North Korea either, but those countries aren’t part of the All-country index, so they are excluded from the new fund by default rather than intent.)

Moreover, plenty of human-rights activists take issue with what passes muster; they might prefer the fund avoid China, Egypt and Russia , to name a few.

As for companies that pass the screening, it doesn’t look like the fund eliminates major multinational giants (think Google, for example) that do business in every corner of the planet. Likewise, activists periodically have created controversy over the labor pool/conditions used to create products for companies like, say, Apple Inc.; while not “forced labor” or “torture,” an activist investor might not feel like those stocks belong in a human-rights fund.

As a result, the fund is almost sure to disappoint the activists it is trying to serve. Wouldbe shareholders don’t need a specialized fund to avoid investing in three tiny countries, or even to exclude stocks whose bad actions come to their attention; if they want a fund, they’d like it with a more rigorous screen.

Likewise, other classically bad “concept funds” never delivered on their hype, dooming investors who didn’t recognize the flaws that arose somewhere between the drawing board and executing the strategy.

The Stockcar Stocks Index fund, for example, opened in 1998 with securities that would profit from NASCAR’S booming popularity. Most “stock car stocks,” however, had nothing at all to do with racing, except for sponsoring race cars; top holdings in the fund — which folded in 2010— included Home Depot, Office Depot, Aflac, and Target, none deriving a significant chunk of revenues from stock-car racing. As a result, Stockcar Stock Index stalled; it was an expensive large-cap fund with a mediocre record. Chuck Jaffe is senior columnist for Marketwatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.