So you've decided you want to think about socially responsible investing (SRI).
First, what is a socially responsible investment anyway? Well, no single definition fits all, but let's start by accepting that some companies have business missions that conform to social agendas--and some don't.
There are two ways to go about socially oriented investing. You can pick companies yourself--if you're rich, really smart, and study financial markets--or you can let a professional mutual fund manager select stocks and pool many other investments with yours in order to buy a collection of stocks and spread risks.
Conventional wisdom says that SRI funds try to earn good returns while supporting companies that do good. However, here's where opinions start to diverge. Some people think that SRI funds always invest in companies seeking to advance social justice (promoting women and minorities, upgrading unskilled labor, encouraging low-impact energy, saving rain forests, etc.) Or they think that at least these funds deploy negative screens and avoid investing in evil, labor-exploiting, carcinogen-pushing, environment-polluting, pro-gambling, alcohol-making companies, or avoid nuclear power utilities and arms makers.
However, not every investor thinks Green Is Good. Some funds select stocks based on religious tenets or lifestyles. Conservative investors (like the Timothy Plan) shun companies involved in family planning, abortions, or disseminating licentiousness. The Timothy Plan is less concerned about ecological matters and is more worried about classic moral values. There are fine gradations between similar SRIs. It pays to read the prospectuses as painful as that can be, to ensure that you're putting your money where your soul is.
Second, heed this caution. Although returns from classic green-oriented SRI funds were quite good in the late '90s and early 2000, you can't assume virtuous investing will always be highly profitable.
All investing involves risks. Nobody can forsee the future clearly. Yes, many funds that undertake socially responsible investing (or SRIs) have done quite well over the past few years. But as automobile ads once warned, "actual mileage may vary."
Moreover, funds that engage in socially conscious investing don't necessarily follow the same rules. For example, some funds avoid alcoholic beverages, casinos, and tobacco stocks. Other shun the nuclear-power industry and weapons makers. Some funds prefer companies with good worker relations, active community involvement, or solid product-safety records. Some funds select stocks based on religious tenets or lifestyles.
Peter DiTeresa, a senior analyst at Morningstar, says that almost all these funds have chosen Microsoft, for better or worse. So how you feel about Microsoft will influence your interest in most funds.
Analyst Catherine Hickey, another Morningstar expert, says that her firm recognized in a special study conducted last year that SRI funds had turned in strong performances compared with all funds, making great strides since 1997. "A year after we last looked at how they stack up," Hickey wrote, "SRI funds as a group are still hanging tough. However, their numbers don't look quite as rosy as they did in 1999. A tough year for technology, and especially mega-cap tech stocks, can take a lot of the blame for the funds' slide. These latest figures also point out the potential pitfalls for investors looking to build an entire portfolio out of socially responsible funds."
Through August 31, 2000, 9 of 68 SRI funds, with records of at least three years, had notched 5-star ratings. That was 13% better than the whole fund universe did. (Only 10% of all funds receive 5-star ratings.) Still, that percentage has fallen since last year, when 21% of SRI funds at least three years old boasted 5-star ratings.
The funds' category ratings fell in 2000 as well, Hickey notes, and she knows why: "You don't have to look too hard to account for the slide in SRI funds' ratings this year. Many SRI funds are weighted heavily in tech stocks because those companies pass their environmental and workplace screens. By the same token, SRI funds often invest little or nothing in traditional value sectors like energy and utilities, because companies in those sectors tend to fail their screens. Being so heavy in tech (and so light on value-priced energy and utilities names) was a huge boon for these funds in the past couple of years, because growth stocks were all the rage in the market.
"But beginning in 2000's second quarter," Hickey explained, "tech stock performance has been rocky, while the energy and utilities sectors are having banner years. This trend has bruised SRI funds' rankings within the overall fund universe and within their peer groups. Among the SRI funds that rode tech to great gains in 1999 (only to come in for some pain in 2000) are DEM Equity DEMNX and Domini Social Equity DSEFX. Both offerings' tech stakes are substantially higher than average for their peer groups.
"Even funds that apply a value strategy to the socially responsible universe are having a rough go of it in 2000," Hickey concludes, "despite a somewhat better environment for that style."
So beware. Invest with your heart, by all means, but know the risks.