Putting your money where your heart is

By Pat Regnier, assistant managing editor


(Money Magazine) -- Years ago I interviewed a money manager who was a Mormon. One of his biggest (and ultimately shrewdest) bets was a tobacco company.

Mormons, of course, are opposed to smoking. The manager told me he'd never invest in tobacco for his own account, but that he also had a duty to put his shareholders' well-being ahead of his own views.

pat_regnier_2009a.03.jpg
Pat Regnier, assistant managing editor

That's a reasonable position. But follow the logic up and down the chain. CEOs, too, say their chief duty is to maximize value for shareholders. Meanwhile, investors like you and me own stocks via mutual funds and have no control over what the manager buys.

Nobody feels as if it's his job to say no to anything that isn't actually illegal. You wouldn't want a neighbor who acted that way.

This lack of accountability, more than any pet issue, is what attracts me to the idea of socially responsible mutual funds and ETFs.

A traditional SR fund stays out of tobacco and screens or ranks stocks based on environmental and labor standards. Others are keyed to the concerns of religious people. Last year a money manager called Faith-Shares even launched denominational ETFs, with one each for Baptists, Lutherans, and Methodists.

SR investing sounds straightforward, but in practice you're placing limits on your options, and that can affect your outcome. Then again, as Santa Clara University finance professor Meir Statman points out, social concerns are no more irrational than other biases people bring to investing.

For example, most folks pay up for actively managed funds, in part because they believe that, against the odds, they'll pick superior managers. Social investing at least has the virtue of, well, virtue. Interested? Follow these guidelines.

Get real about costs ... and benefits: Some well-diversified, less expensive SR funds, such as TIAA-CREF Social Choice Equity, have competitive long-term records, but screening for values isn't free.

Social index funds, for example, charge 0.10 to 0.75 of a percentage point more a year in fees than plain-vanilla indexes. On the flip side, SR funds can occasionally win big, leading some investors to conclude that they'll do better by doing good.

That's dubious. A fund may just be overweighted in a hot industry, an edge that fades over time. Some SR funds looked brilliant in the '90s because they favored relatively clean tech stocks.

Index with care: If you're an index investor like me, you want to track recognized benchmarks such as the S&P 500. But Patrick Geddes of Aperio Group, which manages private SR portfolios, cautions that social index funds often follow customized benchmarks, so they deliver returns quite different from the market's.

Vanguard FTSE Social Index tilts toward tech and away from energy. The FaithShares hold 100 stocks in equal proportions. Two funds that aim to follow the broad market: the TIAA-CREF fund (not technically an index fund) and iShares FTSE KLD Select Social ETF.

Be flexible if you can: There aren't enough SR funds to match every set of beliefs. So if you buy one, you may end up owning a stock you'd rather not.

Still, you're making a statement that as an investor you believe share price isn't the only value that counts.  To top of page

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