If you're looking for a moral laundering service to do the job for you, look no further than your friendly financial advisor. Several firms provide research on SRI and can steer investors toward appropriate individual issues or mutual funds. When it comes to funds, the varieties are as numerous as the opinions. There are funds that invest on Christian principles; funds designed just for Catholics or exclusively for Muslims; funds that seek out companies favorable to women, minorities or any number of specific groups; even two funds that provide a screened version of the Standard & Poor 500.
Why so many variations on a theme? Because socially conscious investing is one way investors can take a stand for (or against) company policies, the need for many funds arises. But does using your heart mean leaving your head behind? Although some publications would have investors believe so, performance numbers dispute this contention.
Mutual fund performance is judged against a standard, usually that of the S & P 500 for any given period. But comparing socially responsible funds measure for measure against this bellwether is like comparing organic apples with inorganic oranges: Funds may include cash, bonds, small and medium-sized company stocks, as well as other securities in their portfolios. A comparison with a large company stock index is therefore inappropriate. A more applicable comparison pits the performance of socially responsible equity and equity income funds against that of the S&P 500.
After leveling the playing field this way, do socially responsible funds stand up to the comparison? According to Michael Van Dam at Morningstar Inc., an investment publishing company in Chicago, of the 7,000 mutual funds Morningstar tracks, only 46 select investments based on social criteria. Of these 46, only four funds have track records longer than five years, and, in that time, only one beat the index. Most relatively new funds fall short. Over the past five years, fewer than one-third of the nearly 500 standard growth and growth-and-income funds have matched the S & P 500's performance.
Of course, anyone who knows anything about mutual funds will tell you (right after they admonish you to get and read a prospectus before investing any money) that a mutual fund is a long-term investment, that five years is nothing in the life of any fund, and that past performance is no indication of future returns. In other words, as far as the relative performance of socially screened funds is concerned, "the jury is still out," says Van Dam.
Van Dam reminds us, "There are talented fund managers out there, and there are also buffoons. Talented managers make money while others may not, no matter what kind of investments they make." Remember, too, that all mutual funds "screen" the universe of stocks and bonds in some fashion. One screen may prove more efficacious than another, whether it involves socially responsible criteria or not.
The use of socially responsible criteria in building a portfolio has its positives. Companies that treat their employees well, don't pollute the environment or produce products and services that better the lives of their customers often face fewer regulatory problems, lawsuits and strikes. It makes good sense (and dollars, too) to consider whether your relationship with a company or fund will end up as doomed as star-crossed lovers.
On the other hand, some investors may not want to consider their investments on anything more than a financial level. They choose instead to go for the best return possible without regard to their investments' social consequences. If that's the route you choose, you may want to assuage your conscience and donate a share of your riches to a charity of your choice. That way you'll do your favorite organization a favor and get a tax deduction, too.
Lorayne Fiorillo is first vice president of investments at Prudential Securities in Charlotte, North Carolina. For information on her funny, fact-filled investment workshops, send a self-addressed, stamped envelope to her in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.