Do the right thing AND make money
Finding a socially responsible fund with decent returns isn't easy. But they are out there, says Money Magazine's Jason Zweig.
(Money Magazine) -- Should you put your money where your heart is? Let's say you agree with Al Gore about global warming - or, on the other hand, you feel that the biggest threat to our society is the corrosion of traditional values.
In either case, there are "socially responsible" (SRI) mutual funds that should steer clear of companies with businesses or policies that you would find objectionable.
If these funds do their job, you never need suffer a guilty conscience about supporting activities you consider immoral, and the funds' returns will let you do well by doing good.
So what's not to like? Just about everything, according to the conventional wisdom, which claims that SRI funds have lousy performance, outrageous fees and even a narrow perspective on ethics.
But I've taken a hard look at these funds recently, and I think much of what you've probably heard about SRI funds is misleading - including most of what I've written about them (I've parroted the conventional wisdom) and some of what the funds say about themselves.
Value vs. values
Let's take performance first. Data from fund watcher Morningstar and research by finance professor Meir Statman of Santa Clara University show that over the long run the difference in returns between SRI funds and regular funds isn't all that big.
During the past five years, socially responsible funds have lagged conventionally run funds by an average of 0.7 percentage points annually.
That's not insignificant, but it's mostly due to the underperformance of technology stocks. (SRI funds at the liberal end of the spectrum tend to like tech firms for their progressive labor policies and their lack of smokestacks.)
Moreover, in the past decade, which includes tech's ups and downs, righteous funds are separated from other actively managed funds by less than a tenth of a percentage point a year. In other words, investing by principle hasn't cost you much principal.
Can that continue? Maybe, but the fact is, it's expensive to research how much pollution a company produces or whether some of its goods are produced by slave labor in China.
And it's even more expensive to wage a campaign to get a company to change objectionable policies. The result: Even when SRI funds invest using indexes of companies (rather than actively buying and selling stocks), creating and maintaining those indexes isn't cheap.
You'll pay fees roughly 0.7 percentage points higher than those you'd pay for the average S&P 500 index fund, and over the long run you can expect SRI funds to underperform by about that amount.
Then again, Statman has found that investors who buy SRI funds don't really care whether they cost more. They would rather compromise on fees than on beliefs.
Moreover, if investing by your moral compass makes you more likely to stick with a fund even when it's down, you'll do better than folks who chase whatever is hot at the moment.
There's still one area, however, where I believe SRI funds come up short. The funds don't advertise the fact, but the truth is that they take a one-size-fits-all investing approach that's straight out of the 1960s, when ideologies were rigid and technology was primitive.
Conversely, if you're an Evangelical Christian, one of the Timothy funds (timothyplan.com) could make sense.
But if you're a devout Catholic environmentalist, a hard-core lefty who smokes and plays poker, or a gay Republican, you're most likely out of luck. You won't easily find an SRI fund that favors "green" companies but opposes abortion, or one that fights global warming but sees nothing wrong with "sin stocks."
"There's not enough dialogue going back and forth between SRI firms and their investors," says David Wieder, the former CEO of Domini Social Investments and now a private investor. "The investment options for SRI should offer more flexibility and control."
Wieder thinks the day will come when you'll be able to create a unique, roll-your-own SRI fund that would invest according to your personal set of beliefs.
Technologically, that's not such a great leap for SRI fund companies to make. But they haven't made it yet.
That leaves three choices: giving up on SRI for now, accepting some compromises in your funds or working with an adviser who specializes in ethical investing and can customize a portfolio.
You can find advisers at socialinvest.org and then do background checks at adviserinfo.sec.gov and brokercheck.finra.org. Stick to fee-only advisers, ask questions about the adviser's beliefs, and get the details of how he or she screens companies and mutual funds.
This service won't come cheap, likely 1 percent of your invested assets a year, and many advisers have high minimums. But you can probably arrange a short-term consultation for $2,000 or so.
That's a price you'll have to pay until the ethical fund industry finally recognizes just how complicated you really are.Send feedback to Money Magazine