Monday, February 1, 2010

Socially Responsible Investing Run Amuck?

Growing concerns about climate change and financial accountability have contributed to the rise of social investing. There are so many funds appealing to social investors, choosing a portfolio based on financial, environmental, and social returns can be daunting. These days funds range from corporate governance based, environmentally specific, social awareness and religion-themed funds.

Something for everyone may be an understatement. New faith-based exchange-traded funds (ETFs), managed by FaithShares Trust, cater to various Christian beliefs. The Trust uses statements by each church group’s national body, such as the U.S. Conference of Catholic Bishops, to define its investing approach. FaithShares Lutheran Fund avoid spirits producers, the Methodist Fund allows companies with less than 10% in alcohol-related revenue, and the Christian Values Fund abstains from any company that produces a caffeinated or alcoholic substance. The Catholic Fund takes a case-by-case approach. Similar to other socially responsible funds, FaithShares takes hundreds of stocks and weeds out the ones that don’t fit its parameters. The differences can become a bit obscure.

Environmentally focused funds have garnered more interest. Popular offerings include solar and wind specific portfolios such as PowerShares WilderHill Clean Energy Portfolio and First Trust Global Wind Energy. But risk-averse investors beware; this field is extremely dynamic with rapidly developing technologies and players. Broader-values based ETFs may be a safer bet. The iShares FTSE KLD Select Social Index Fund has a strong volume of stocks and outperformed the Dow Jones Industrial Average in 2009. KLD is typical of larger socially responsible funds in that it invests in similar holdings in the S&P 500, so its performance is characteristically more congruent with the main stream. However KLD’s services are far from free. And while these funds may perform better, they include stocks like XTO Energy (Calvert Social Investment Balanced Fund) and BP (Wells Fargo Advantage Social Sustainability Fund) and so may not agree with truly green advocates.

Despite all their popularity, the effectiveness of these funds as an investment or moral vehicle remains debatable. Fees for socially conscious funds are often higher than similar funds. Although many of these funds act like index funds, in some cases you are paying a high cost premium to support your cause. Newer and narrower funds may lack historical performance data and hold fewer asset options. Further, some funds stretch the definition of “socially responsible” to include high performing large caps or high growth stocks.

So how to choose an SRI fund that suits your portfolio? Do your homework, thoroughly, on the firm, the fees, and the returns. And make sure the funds do theirs. Most reputable SRI funds have a transparent methodology and criteria by which they choose the assets under their management. They also share clear metrics on the historic performance of each fund. For those who’ve thrown in the morality towel, there’s always the Vice Fund. Its biggest holdings include tobacco, spirits, and defense contractors. Although cleverly named, its performance has suffered and assets under management have declined in the past few years. Go figure.

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1 comment:

  1. I would suggest that the reason for increasing interest in socially responsible funds and decreasing investment in the Vice Fund is simple: ethics is rising, environmental concerns are rising, health concerns are risinig.

    Generally, our collective consciousness is changing. From Paul Ray's eminently successful study of Americans' values, we find that we are progressing from what he defines as 'moderns'--who value status and greed above all else, to "cultural creatives'--whose primary values are personal and spiritual developement.

    Incidentally, I advocate, teach and write about ethical investing on my globally popular site at

    Best wishes,Ron