Saturday’s New York Times had an interesting article on socially responsible investing and filled in some of the holes in my earlier posts. First, this is a growing area and about one in eleven dollars is directed toward socially responsible investments which is actually more than I would have expected:
Although socially responsible investments have grown substantially over the last 10 years, they still represent a small part of the world of investments under professional management: 9.4 percent, according to a report by the Social Investment Forum, a trade group for the industry (www.socialinvest.org).
Surprise, surprise–this is not really a new idea (very few things are):
Socially responsible investing dates back hundreds of years and has a religious cornerstone, said Steven J. Schueth, president of First Affirmative Financial Network, an investment advisory firm that focuses on such investments. Methodists, for example, did not want to invest in sin stocks, meaning companies that sold tobacco or liquor, and Quakers refused to invest in slavery or war.
One of the simplest way to categorize “good” companies is to screen out those that do “bad”:
Negative screening to eliminate companies that do or make things you do not like is one way to choose an investment. According to the Social Investment Forum’s report, “2005 Report on Socially Responsible Investing Trends in the United States,†the most common product people screen out is tobacco. More than 88 percent of the total assets in the universe of socially screened funds are in tobacco-free companies.
There are a lot of companies and funds that focus on socially responsible investing:
Among the best known are Calvert, Domini Social Investments and Pax World Funds. But if your notion of a socially responsible investment is, say, a small wind-power company or a health food start-up, you may be surprised that Amy Domini, chief executive of Domini Social Investments, also has McDonald’s on her list.
You can also put your money where your mouth is buy electing to invest in funds with particularly political bents:
The Women’s Equity Fund (www.womens-equity.com) invests in stocks that advance women in the workplace, for example. Portfolio 21 (www.portfolio21.com) and Sierra Club funds (www.sierraclubfunds.com) focus on companies they consider environmentally progressive.
The challenge is that “good will” and “good returns” aren’t always in sync:
“In the early days, people who wanted to invest in socially or environmentally responsible companies were not so concerned about performance, but wanted to see their money make a difference,†Mr. Schueth of First Affirmative Financial Network said. “Now they want to see their money do double duty. They want to make a difference, but they want to retire comfortably.â€
In the late 1990s and early 2000s, such investors were attracted to portfolios that focused on high-tech and health care, which were booming. But Mr. Schueth said the industry was now “running into some headwinds,†because tobacco and oil companies and weapons manufacturers — unacceptable to most socially responsible investors — have done particularly well over the last few years.
Roy Weitz, publisher of Fund-Alarm.com, a Web site that takes a skeptical look at the mutual fund industry, said he believed that in the long run, socially responsible investments “get a less optimal return, because any time you place artificial limits on what you invest in, you’re limiting your upside.â€
So, where does that leave us? Investing in companies or funds that aspire to do well by doing good may not provide the best returns. That doesn’t mean you shouldn’t try–it just means you may have to work a little harder to find high performing investments that match your values. Zac Bissonette, on BloggingStocks.com identifies a couple of “values-based” stocks that have done particularly well of late including Amana Mutual Funds and The Ave Maria Catholic Values Fund. Of course, he also notes that The Vice Fund, an antisocial responsibility fund has also done really well too. Hmmm–temptation abounds.