You know that stock investing is the best way to reach your long-term financial goals. But what if you don’t want to invest in companies that don’t support your values? The answer: socially responsible investing (SRI), an increasingly popular practice in which investors avoid buying shares of companies that go against their personal philosophy — whether it’s an aversion to tobacco or firearms, or a focus on environmental issues.
Socially Responsible Investing in Today’s World
Socially responsible investing has recently been making waves in the mutual fund world, where more than 60 funds promote ethically-minded investing. Assets held in socially responsible mutual funds have ballooned over the past couple of years, from $5.5 billion in 1997 to a almost $13 billion this year.
Socially responsible mutual funds come in all shapes and sizes. Some have a relatively broad focus, investing in companies that pass general guidelines for social responsibility. Alternatively, the funds’ focus can be quite specific: The Women’s Equity portfolio, for example, focuses on shares of companies that are run by women or who actively participate in furthering women’s economic lives.
Other funds avoid filling their portfolios with firms who contribute to unfair labor practices or human rights violations. The increasing number of socially responsible mutual funds makes it easier for investors with specific social and ethical viewpoints to find funds that complement those ideals.
Risk and Reward in Socially Responsible Investing
However, because socially responsible mutual funds ignore certain parts of the market, their returns can founder when those ignored sectors turn into market darlings. For example, while many socially responsible funds posted impressive returns in 1999, this year has been another matter.
Last year’s success was due in part to socially responsible funds’ relatively heavy weighting in the high-flying technology sector. This year, the tech boom has slowed while the oil and energy sectors — which most SRI funds tend to avoid — have rebounded into the limelight from relative market obscurity.
That shift highlights an important lesson: Any fund that focuses on a particular segment of the market is bound to have its shares of ups and downs. For a smoother ride, look for a fund that is well diversified among different industries and sectors.
Investments to Care About and Funds to Think About
One of the most popular — and best performing — socially responsible funds has been Domini Social Equity (800-762-6814; $1,000 minimum investment; no load). The fund screens companies on a variety of issues, from involvement in alcohol and tobacco production to environmental and labor practices. After a stunning 1999, when the fund’s 22.6% return handily outperformed the S&P 500, the fund this year has suffered due to its 42% stake in technology stocks.
But long-term investors haven’t been disappointed with the fund, whose returns have placed it in the top 25% of large-company blend funds during the most recent three-year and five-year trailing returns. One of the oldest SRI options, Domini Social Equity is a good choice for investors looking for a broadly screened portfolio with an aggressive weighting in the tech sector.
The Pax World Fund (800-767-1729; $250 minimum; no load) takes a more conservative approach. It holds shares of companies that pass rigorous screens for involvement in such things as gambling, tobacco, alcohol and weapons manufacturing. The fund’s portfolio holds good-sized stakes in equities, bonds and cash. That approach has made Pax World half as risky as its typical peer for the past three, five and 10-years. The fund’s diversification has also helped it avoid large downturns when certain areas of the economy have run into trouble. That’s part of the reason why Pax World has posted three- and five-year returns that place it in the top 5% of its category.
Additionally, two new SRI mutual fund offerings from well-respected fund families are worth a look. The portfolio of Vanguard Calvert Social Index (800-662-7447; $3,000 minimum; no load) is comprised of the over 400 stocks that make up the Calvert Social Index. Financial services firm TIAA-CREF offers Social Choice Equity (800-223-1200; $250 minimum; no load), which screens the stocks in the S&P 500 for appropriate portfolio candidates. In the long term, both funds should benefit by their respective companies’ large research teams and solid historical performance. The funds’ extremely low expense ratios are also a big plus for savings-conscious investors.
No matter what your socio-political inclinations may be, chances are there is a mutual fund investing in companies that mesh with your personal values. As the huge increase of assets in socially responsible investments illustrate, the financial community is discovering that reaching your long-term financial goals doesn’t have to take a backseat to being a compassionate or conscious investor.
