So I hear a fair amount from clients who want to talk about investing in a socially responsible manner. And I have a few answers for them when we discuss it. I think some of this sort of parallels some of the discussions that have taken place here about whether charities are efficient with their donations versus spending a lot of the donations on big overhead etc. It also ties into what I think we as Christians and pro-gun owners should do by supporting gun friendly or Christian businesses, albeit from a slightly different perspective.
And for these comments I will cite mutual funds as its the way most people invest. Morningstar and other entities will categorize "socially responsible" funds that can be sorted, researched, etc. But the difficulty in that broad category is that every fund has a slightly different bent on it and every portfolio manager has a slightly different approach. And some times those differences can mean a world of difference to you as an investor. So some serious due diligence is warranted. But I also have an alternative view that I will propose at the end.
So first is the "category". Morningstar defines "socially conscious" funds as:
Any fund that invests according to non-economic guidelines. Such funds may make investments based on such issues as environmental responsibility, human rights, or religious views. A socially conscious fund may take a pro-active stance by selectively investing in, for example, environmentally-friendly companies, or firms with good employee relations. This group also includes funds that avoid investing in companies involved in promoting alcohol, tobacco, or gambling, or in the defense industry.
The problem with this broad a category is that what one fund company views as a "bad" company from any of these perspectives, another manager might see as "good". This leads to problems when comparing the performance of various funds and how well a manager has performed and whether he or she is worthy of managing your money.
I remember a discussion I had with a portfolio manager a number of years ago. He was vehemently against American Express because he said they send credit card offers to recent college graduates, enticing them to borrow money. Now one of his largest holdings was VISA. I said "Isn't it a bit hypocritical to say Amex is bad when they require paying off the card every month but VISA, which is one of your largest holdings, entices those same students to take on debt but likes it when the debt rises by allowing the young kids to pay a "minimum amount"? Which does more harm to the kids? Amex who requires the kid pay it all off every month or VISA which allows a $5,000 bill to grow to $10,000 or more through egregious (usury?) interest rates?" He just kind of sputtered and never had an answer I felt was okay. But my point here is that some will invest in a fund and some of the holdings of that manager may be very much at odds with how you feel.
Another one that came up one time was a fund that invested using Islam as its tenet. I was doing a search for the investment committee of a big client that was/is EXTREMELY socially conscious (think of really good ice cream... ::)). Anyway one of the best performers during the time period we were looking at was an Islamic based fund that invested based on Sharia Law. (Now keep in mind that this was in the mid to late 1990's so long before a lot of people who don't pay attention were familiar with Sharia Law...heck a lot of people NOW don't know what Sharia Law is all about but even fewer did back then). At first they were discussing the performance and then focused on the Islamic aspect. They thought that was fine and that it might be viewed as being very tolerant of them. Then I asked them if they thought there might be a problem with how Islam treats women? I had printed out some news stories and some other stuff that I had discussing Muslim practices against women. They quickly decided that it would not be a good fund to include in their lineup! ha. But my larger point is that the "net" cast around funds like this can catch a lot of funds, not all of which you may feel are in keeping with your belief system. And that ultimately can cause some difficulties for selecting a fund based on a performance/returns evaluation.
So you may be asking with all these reasons NOT to invest in this fund or that fund, what should I do? I think there are two roads an investor can go down. One is certainly to do some research and if you find a manager that you agree with and trust then you can invest with them. But here is another way to do it that may be easier to fulfill and you may find it helpful. Invest PURELY for return. Invest simply to maximize your profits. Any time a fund is investing for (as Morningstar puts it) "non economic guidelines" then they are (at least potentially) accepting lesser returns to make some larger point about their investments. I say spin that around and invest for maximum growth, then realize you can give more money to the charities that you support with the additional gains you have received. I have taken it further in discussions on this topic over the years- once when I was discussing the performance differential with a client they lamented how much money the tobacco and oil companies were making (this was in MA after all... ::)). I suggested they could invest in those companies and then if they felt that strongly about it take the earnings they made and donate them to anti-smoking or green energy causes. At the end of the day they decided to invest solely for return and whether they did or did not donate more to charities I have no idea. (I suspect I know the answer to that one too....). But my point is this can be done from a Christian or pro-gun supporting way as well....invest to maximize returns and use your earnings to support charities and entities that support the causes you believe in. That in my mind is JUST as beneficial (if not more so) than investing in some "SO CALLED" socially responsible fund. I think many times (not all mind you, but at least for many of the people I have spoken with about this topic) they often are investing in socially responsible funds simply to pat themselves on the back and be able to say they are at cocktail parties.
Anyhoo....YMMV. :)
