Investing in Good Corporate Citizens
For decades, banks managing pensions and other institutions have practiced "social investing," picking stocks in companies that meet ethical criteria. In the 1970s, some public pensions shunned IBM because the company did business in apartheid-era South Africa.
Since then, some church endowments have steered away from companies that produce alcohol or pornography. In recent years, many "social" mutual funds have appeared. Morningstar, a fund analysis company, follows 101 funds that use social criteria of some kind. The list includes portfolios aimed at Catholics, Muslims, union members, and environmentalists.
Critics of social investing argue that the strategy reduces returns by limiting the field of stock choices. But the evidence against social investing is far from clear. In the 1990s, social funds on average outdid their non-social competitors. This occurred because many social funds emphasized red-hot technology companies, which have reputations for being upstanding corporate citizens.
Lately, social funds have lagged a bit, partly because they have tended to avoid high-flying energy stocks, which are viewed as polluters. During the five years ending on January 31, 2007, the average large-blend social mutual fund returned 6.5% annually, about 0.1% behind conventional competitors. "Many studies have shown that applying social criteria doesn't necessarily hurt long-term returns," says Adam Janzer, general counsel of Domini Social Investments, a money manager.
If you want to try investing with your conscience, it is not difficult to follow simple criteria. Instruct your financial advisor or management company which type of companies to avoid placing in your portfolio. Most investment advisers are willing to build customized portfolios. "With the latest software, it is easy for a manager to screen out a specific kind of stock that the client wants to avoid," says Len Reinhart, president of Lockwood Advisors, which manages private accounts.
But stock picking can be difficult if you use more complicated screens. For example, how can you determine whether a company is really a poor corporate citizen? Inevitably, you must make subjective judgments that involve hairsplitting. Consider that many social funds own Microsoft because the software giant provides rich benefits for employees. At the same time, some social investors avoid Microsoft, since it offers health benefits for unmarried partners of employees.
The easiest approach is to buy a social mutual fund. A top choice is Calvert Social Investment Equity, which has returned 8.8% annually for the past decade, outdoing 90% of its large growth competitors. Calvert emphasizes makers of drugs and consumer products with steady revenues. Big holdings include Johnson & Johnson and Procter & Gamble. Another strong choice is Ave Maria Catholic Value, which owns steady companies with modest prices, such as paint maker Sherwin-Williams.