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Save the Earth Sacrifice Your Returns?
This is an undated handout photo of a polar bear taken in the Artic National Wildlife Refuge. Museum-goers in San Francisco will soon get an uncensored look at Alaskan wilderness photos that ignited a minor uproar in the nation's capital this spring. The new exhibit features 49 photos of the Arctic National Wildlife Refuge - 19 million acres of pristine wilderness at the center of a fierce debate between environmentalists and the Bush Administration. (AP Photo/Subhankar Banerjee)
(By Subhankar Banerjee -- Associated Press)
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But he added that investors do much better with the handful of socially responsible index funds, which lag behind their traditional competitors by only about 0.6 percentage points a year. Unlike actively managed funds, which constantly change holdings in pursuit of hot stocks, index funds simply buy and hold stocks in a market gauge such as the Standard & Poor's 500-stock index. Socially responsible index funds match the selected market barometer but exclude companies contrary to their social goals.
One reason socially responsible funds trail is the extra cost of screening, said Morningstar fund analyst David Kathman.
Many social investing funds did well during the tech boom of the late 1990s but then trailed competitors after that bubble burst early this decade and energy companies took off, Kathman said. That's because social investing screens tend to eliminate polluters like energy companies and to emphasize technology companies because many are considered clean.
Kathman said he could think of only one socially responsible fund good enough to invest in even if one does not care about the social criteria: Amana Growth Fund, which follows Islamic principles banning alcohol, gambling and pork processing. It also shuns financial companies because Islam prohibits charging or paying interest. Though it has cooled a bit in the past 12 months, the fund beat the S&P 500 by more than five percentage points a year over the past decade. Kathman credits talented stock-picking rather than luck.
Many socially minded investors accept that they may get smaller returns.
James Scott, a 60-year-old physician in Portland, Ore., keeps two-thirds of his retirement portfolio in socially responsible funds.
"I'm in the first wave of the boomers," he said. "I kind of grew up in the '60s and always have been for social justice and things like that."
Scott asked a financial adviser to build him a well-diversified portfolio of SRI funds. For starters, that meant no tobacco companies. His returns have been beaten by the S&P 500 by about one percentage point a year, he said.
"I'm okay with that because it makes me feel good about how my money's invested," he said.
Changing the World?
Whether social investing results in changes to corporate policies is the subject of debate.
Theoretically, banning a stock should reduce demand for shares, driving down the price and spurring a company to mend its ways. In fact, social investing, though growing, is too small a niche to have much clout, according to many who have studied it.
"I don't think it has any effect on share prices," said David Vogel, a professor of business ethics at the University of California at Berkeley who has studied social investing. "I think there's very little evidence that it's changing the world. . . . No tobacco firm is going to stop producing tobacco."
