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Socially Responsible Investing: |
At last another tax season has come and gone. You've just paid your taxes and made some investments, yet you might very well be inadvertently supporting a company that goes against your core beliefs. How do you know what companies do with their products, and what influence can your investment have on them?
What we at BWZ hope to explain is what investing with a "social conscience" really is, determine if it's right for you and your portfolio, and check the latest performance numbers on a few funds.
What Is Socially Responsible Investing, Anyway?
Socially responsible investing (SRI) is a way to build an investment portfolio that reflects your morals, values, and belief system. It may involve avoiding companies with corporate practices you deem unacceptable or supporting acceptable ones. The strategy of socially responsible investing grew from an early desire by many in the religious community to avoid investing in companies that profited from the sale of alcohol, tobacco, or gambling products.
SRI became a more popular investment alternative in the 1980s. In 1984, the number of people involved in what we now call SRI evolved from around $40 billion to close to $1 trillion by the end of 1995. The portfolios of churches, universities and colleges, and state and city pension funds were among the largest financial assets involved with SRI.
How Did SRI Get Started?
SRI was started by investors during the Vietnam War who did not want their investments supporting the war. From that beginning, social responsible investing rapidly spread as investors began screening their investments for such issues as corporate environmental practices, whether or not U.S. business operations and investments in South Africa supported apartheid, and how American companies treated their employees. Until the mid 1980s, SRI was considered to be nothing more than what Fortune magazine sarcastically called "feel-good investing" or what would be labeled today as "politically correct" behavior.
Despite that sentiment, investing with a social conscious entered the mainstream as the investors emotions were stirred by issues such as apartheid in South Africa, the environment, and abortion. The number of mutual and money market funds that utilized some type of social screening increased from about a half a dozen in the early 1980s to over 60 by 1995.
How Does SRI Work?
Socially responsible investing involves a great deal of research in order to understand each investments' screening strategy and profit potential. As in all issues concerning values and money, investors may find that the distinction between acceptable and unacceptable a bit blurred. Many investors could interpret social responsibility as 'not being socially irresponsible'. But that's not entirely true.
The oldest social screen around is the sin screen: No tobacco, liquor, or gambling investments. Recently new funds have been formed to address issues such as animal testing, abortion, armaments, nuclear power, and pornography. Company screening can be made either negatively to avoid 'bad' companies or positively to support 'good' ones. Or the fund can address an issue like abortion taking a stance such as 'pro-life' or 'pro-choice'.
Although a Socially Responsible fund can include many overlapping criteria, the basic structure of the every fund can be simplified with the following four components:
- The Fund Manager - the person or institution making the decisions about asset allocation and what to invest in.
- The Criteria - what are the investment guidelines and restrictions the fund manager must follow. For example, the Timothy Plan, which is in accordance with Christian living, screens on issues such as abortion, pornography, alcohol, and tobacco.
- The Outside Research - an organization, group, or agency that provides company information the fund manager needs to make investments. Social Venture Briefings Company has a screening service called Investors Circle which is used by companies such as The Calvert Group and other investors interested in investing in socially responsible businesses. The Investors Circle is a program by which the experienced investor is introduced with the socially responsible entrepreneurs. The Parnassus Fund uses a combination of in-house researchers and college interns, while the Ministry American Family Association (Missouri) and Life Decision International (a New York-based organization which researches and reports on companies making Planned Parenthood donations) screen particular issues for the Timothy Plan.
- The Share Price - the price of an issue when an investment is made.
- The Committee - an independent group which meets quarterly to ensure that share purchase are within the guidelines set by the criteria. Meredith Ross, Portfolio Manager of the Amana Growth Fund, a fund that screens based on the Islamic faith, recently was instructed by the committee to make a changes in the funds' holdings liquidating Albertsons because the store sold alcohol.
What's My Role?
Your social investing strategy should be formed after you have set your overall financial goals. The first step in socially responsible investing is to develop your social investment criteria. These criteria may be exclusionary, inclusionary, or activist.
Exclusionary, or negative, criteria are factors that will cause you to not invest in a certain company. Violations of equal employment laws, tobacco production, birth control, and animal testing are all examples of what might be considered negative criteria.
Inclusionary, or positive, criteria are those factors that would encourage you to invest in a company. Positive advertising policies, solid waste reduction programs, good records of charitable giving, and community involvement are examples of what might be considered positive criteria.
As a socially conscious investor, you may follow several different strategies once your criteria have been developed. You may choose to avoid investing in companies whose policies or practices violate your social criteria. You may choose to invest in companies with policies or practices you view as positive by becoming a shareholder. You may also identify a company that violates your social criteria and work to reform it from within as an active shareholder.
Performances: The Good and the Bad
The mainstream investment community has traditionally downplayed the increasing popularity of SRI on the grounds that the fund manager has limited flexibility to maneuver due the constraints placed on the fund by the criteria. For this reason ,SRI funds are thought to under-perform the market.
In March 1996, the Progressive Environmental Fund liquidated all their SRI funds 'in the best interest of the shareholders' due to low assets and poor performance. After a stellar year in 1994, the Parnassus Fund managed by Jerome Dodson, returned -2.91% in 1995 in a market that saw the S&P 500 index return over 30%. The fund experienced a bit of bad luck in the last quarter with some technology stocks doing poorly and a larger holding, Sunrise Medical, who had the misfortune of some unethical managers at one division who were mis-stating revenues and expenses. The managers were let go, the financials restated, and the company instituted safeguards against this happening again. Nevertheless, the stock took a beating.
This and other portfolio mishaps occurred after good returns for most of that year. The Parnassus Fund also received a large capital surge by investors looking at past great performances. However, recent depressed share prices show that the Parnassus Fund may be regarded as a good value.
But all is not gloom and doom. Funds with strict criteria such as the Amana Growth Fund returned 22.4% in 1995. And SRI funds are not without their own high flyers such as new-comer Neuberger & Berman Socially Responsive Fund, Domini Social Equity Growth, and Citizens Trust Emerging Growth which kept pace with the sizzling S&P500 index in 1995. (See the side-bar for more fund performances.)
| Fund | Symbol | 1996 | 1995 | 1994 |
|---|---|---|---|---|
| DSI 400 | 5.15% | 38.2% | 0.18% | |
| S&P500 | SPX | 5.37% | 37.58% | 1.32% |
SRI Sentiment
SRI has been criticized from both the right and the left. Wall Street and the traditional investment community thinks it is flakiness by people who hate capitalism. The left thinks it is a cop-out to capitalism. The prevailing argument for SRI funds is that they perform well in good and bad times because these companies operate on a solid foundation. Another commonly accepted theory is that investors can force down the price of the stock by not buy it and forcing the company to shed it's offensive businesses or behavior. In all likelihood, companies won't feel the effects of the SRI investor.
Perhaps the most effective way to change the conditions that are a concern to the individual investor is to give directly to the organizations that fight for those causes.
Common Sense Investing
While surveying various SRI funds, you might come to the same conclusion about socially responsible investing as with any industry specific funds. The investor can be exposed to industry specific risks. However, there is room in your portfolio for an SRI fund. Just use the following guidelines while searching for SRI mutual fund that fits your portfolio.
- Scrutinize the fund manager. Fund managers are chosen for the same reason some gamblers at the race track pick the jockey rather than the horse. Track record.
- Savvy investors who make all their own decisions and watch over their portfolio, should consider investing in no-load funds with low expense ratios. Make all your money go to work for you right away.
- Obtain a prospectus and carefully examine the social and financial policies that the fund manager has set up. See if your financial goals and investment criteria are being addressed. For a summary of performance and portfolio holdings, review the funds' recent annual report.
- Do not choose funds with enormous assets. Funds with large assets limit the fund manager to grow the fund.
- Rate fund performances on an even playing field. Use the total return for one year and compare it to a major market indicator, such as the S&P 500 or the Domini Social Index, to gauge the funds' performance for that year. Then use the total return for one, three, and five years and compare it to the average fund in its' category.
- Keep your portfolio diversified. Pretty simple, don't put all your eggs in one basket.
Want Some Help?
If you would like some assistance, understanding, choosing, and watching over your portfolio of funds, here are some additional sources of help.
- On May 5-7, 1996 the Investors' Pasquinade Conference will be meeting at the Park Plaza Hotel in Boston. The Investors' Pasquinade is a conference designed to offer a long term, responsible alternative to the money-centered, short-term investment strategies.
- Eric Smith shares an extensive list of published books and periodicals that can be found in a store or library near you. Eric is a Certified Financial Planner with Wall Street Northwest, a branch of KMS Financial Services, Inc. They serve the SRI investment needs for investors in the Pacific Northwest and California. He is also a member of The Social Investment Forum since 1986.
- Progressive Management is an independent brokerage firm specializing in SRI investing in the Bay Area.
- Investing for a Better World is a newsletter distributed by Franklin Research & Development which is focused for the socially conscious investor. For a free sample email frdc@igc.apc.org.
- There is a public mailing list that discusses among other things, SRI. Catch up with the conversation or join the SRB/SRI mailing list, by sending email to listproc@mail.together.net with the message: subscribe srb [first name] [last name]
- For more information, check out the Better World Links on Investment.
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For a limited time you can call 1-800-713-8086, and recieve a FREE copy of You, Your Money, and the World, an informative brochure on SRB/SRI published by Co-op America. |
SRI Mutual Fund Performance Charts
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