Socially REsponsible Investing (long)

Jun 23 19:54 UTC 2003

  
  Five Winning Funds How to Be Good -- and Profitable 
  
  By Stephen Schurr Senior Editor 06/19/2003 11:00 AM EDT URL:
  
http://www.thestreet.com/funds/fivewinningfunds/10094738.html
  
  The top three questions a financial journalist hears: When will
  the bear market end? Can you give me a good stock tip? And (be-
  lieve it or not), how can I build an ethical stock portfolio?
  
  That's the honest-to-goodness truth -- perhaps "altruism" should
  be added as a distant third emotion that influences the market,
  after fear and greed. The first two questions are hard to answer:
  I think we are in a "low-return environment" in the U.S. that
  will last for at least a decade, and I'm not much of a stock-
  picker. (Ask James Altucher, Arne Alsin, Jim Cramer or one of the
  many Real Money or Street Insight columnists who knows his
  stuff.) The third one is easy to answer, although it does come
  with some caveats: Consider socially responsible funds.
  
  This week's Five Winning Funds examines the stellar offerings
  from the world of socially responsible investing -- SRI funds,
  for short -- and it represents a bit of a change in my thinking.
  
http://www.socialfunds.com
  
  My old answer to question No. 3 was: Ethics are too subjective to
  consider in an investment portfolio. Microsoft (MSFT:Nasdaq -
  news - commentary) is ethical to some for treating workers fair-
  ly, but unethical to others who say its 800-pound gorilla tactics
  stifle competition. Or, General Dynamics (GD:NYSE - news - com-
  mentary) may be unethical to some because it makes weapons that
  kill people, but others may have no problem with the high-tech
  weaponry that helps protect America. Besides, there's no real
  proof that a do-gooder approach translates into better returns.
  My old advice: Make your investments to make money, and make the
  world a better place by volunteering.
  
  However, over the past few years, my answers have evolved. Recent
  studies, including one conducted by the SRI World Group for its
  Social Funds Web site, indicate SRI funds have, in general, held
  up better than non-SRI funds during the three-year bear market.
  Thirty of 52 SRI funds topped more than half of their peer non-
  SRI mutual funds. That's not overwhelming and it's a short time
  horizon, but it does signal that SRI funds are as viable as other
  mutual funds. It also refutes the old line about SRI funds not
  doing well in bear markets because of their aversion to industri-
  als, materials and "sin" stocks that hold up in downturns.
  
  Also, SRI funds have gone a long way to overcome the perception
  that they focus on do-gooder companies to the exclusion of stocks
  that look good. These funds don't have 80% of their assets in Ben
  & Jerry's; in fact, Intel (INTC:Nasdaq - news - commentary) is
  the top holding among SRI funds, according to Research magazine.
  Other big holdings include Cisco (CSCO:Nasdaq - news - commenta-
  ry) , SBC Communications (SBC:NYSE - news - commentary) , Merck
  (MRK:NYSE - news - commentary) and, yes, Microsoft.
  
  "We understand how Corporate America works -- there is no perfect
  company," said Todd Ahlsten, skipper of the stellar Parnassus
  Equity Income fund.
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=PRBLX
  
  "But when we go to bed at night, we want to feel confident that
  the companies we own are responsible companies that are trying to
  do good for society." (Click here to read a companion profile of
  Ahlsten and his fund.)
  
http://www.thestreet.com/funds/fivewinningfunds/10094625.html
  
  The last reason I've changed my tune on SRI funds is a matter of
  ethics. Given the spate of corporate ethics scandals, the threat
  of terror that makes the world a more dangerous place and, frank-
  ly, the fact that many multinationals regularly flout environmen-
  tal and human rights issues, it is heartening that a swath of the
  investment arena diligently searches to find companies that aim
  to make the world a better place, along with making money. Ap-
  parently, others feel this way: In 2002, while U.S. stock funds
  saw $10.5 billion in net outflows, SRI funds had $1.5 billion in
  net inflows, according to Lipper, a Reuters company.
  
  What's kept me from shifting all of my portfolio over to SRI
  funds -- despite my wife's suggestion to do so -- is that I don't
  think it's possible yet to build a diversified portfolio con-
  structed entirely of SRI funds. While there are some outstanding
  U.S. equity funds that pass SRI screens, the group comes up short
  when it comes to international investing, which makes up more
  than half of my portfolio these days. Worthy SRI bond funds,
  meantime, are in relatively short supply, as well.
  
  Nonetheless, there are some great SRI funds out there, including
  the five featured in today's column. The list aims for asset-
  class diversity -- a good small-cap fund as well as a fixed-
  income fund, etc.
  
  One last thing: Investors looking to buy into SRI funds have two
  considerations. First -- and this applies to all funds -- make
  sure the funds have solid management, a history of strong returns
  and below-average costs. Second, make sure the fund's definition
  of ethics matches yours -- SRI funds run the gamut from religious
  funds such as the Aquinas Growth Fund
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=AQEGX
  
  to environmental funds such as the Sierra Club Stock Fund
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=SCFSX
  
   to women's issues funds such as the Women Equity Fund.
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=FEMMX
  
  A good place to start is Social Funds' Mutual Fund Center.
  
http://www.socialfunds.com/funds/chart.cgi?sfChartId=desc
  
  1. Parnassus Equity Income (Large U.S. Stocks)
  
  While the $193 million-in-assets Parnassus Equity Income fund
  (Ticker: PRBLX) falls broadly under the "large-blend" category,
  the value-oriented manager Todd Ahlsten takes a "go anywhere" ap-
  proach that hunts for companies big and small. The fund aims to
  keep about 75% of its assets in dividend-paying companies, making
  the fund a decent way to look for yield.
  
  Do-gooder or no do-gooder, Parnassus Equity Income has been one
  of the best funds around since its 1992 inception. The fund's
  five-year average annual return of 10.9% ranks in the top 1% of
  all large-blend funds, according to Morningstar, and its 10-year
  returns rank in the top 8%. While Ahlsten has only been at the
  helm alone for one year (he's been with Parnassus for nine
  years), the one-year return of 8.13% ranks No. 1, according to
  Morningstar. And as today's Q&A demonstrates, his philosophy on
  investing and corporate ethics mirror his predecessor closely.
  Tech lovers, look elsewhere.
  
http://www.thestreet.com/funds/fivewinningfunds/10094625.html
  
  Apart from a small Cisco stake and a few other holdings, Ahlsten
  sticks to less frothy fare such as Johnson & Johnson (JNJ:NYSE -
  news - commentary) .
  
  The no-load fund's low turnover rate helps keeps the expense ra-
  tio at a trim 0.96%, compared with the 1.28% category average.
  
  2. Ariel Fund (Small U.S. Stocks)
  
  We extolled the virtues of the Ariel Fund (Ticker: ARGFX) in a
  recent Five Winning Funds on small-cap value stock funds
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=ARGFX
  
  and in a 10 Questions interview with longtime skipper John
  Rogers.
  
http://www.thestreet.com/funds/stephenschurr/10089512.html
  
  One thing we didn't mention: Ariel Fund also passes the SRI
  screen.
  
  Rogers, at the helm since the fund's 1986 inception, has racked
  up stellar performance: Its 10-year average annual return of
  12.23% ranks in the top 17% among its peers, and the fund's
  three- and five-year rankings are good for the top 18% of all
  small-cap value funds, according to Morningstar. His basic in-
  vesting philosophy: "Slow and Steady Wins the Race," as evidenced
  by the tortoise logo that graces the fund's Web site. The no-load
  fund sports a below-average 1.19% expense ratio.
  
  For investors looking for a solid small-cap SRI fund, Ariel is a
  great bet.
  
  3. Ariel Appreciation (Medium U.S. Stocks)
  
  Another Rogers-helmed fund turns up on the SRI list, and once
  again it's a great long-term performer: the mid-cap blend Ariel
  Appreciation fund.
  
  Rogers took the reins of this fund in September 2002 from Eric
  McKissack, who managed to notch impressive returns while at the
  helm. Rogers is the founder of value-oriented Ariel Capital
  Management and the longtime skipper of the firm's eponymous stel-
  lar small-value fund, which should placate smart investors who
  seek an experienced hand at the wheel.
  
  The fund's three-year average annual return of 11.3% ranks in the
  top 4% of all mid-cap blend funds, and the 10-year average annual
  return of 12.98% ranks in the top 15% of its peers, according to
  Morningstar. The no-load fund's buy-and-hold approach has kept
  turnover to a mere 13% and its expense ratio at a below-average
  1.26%.
  
  4. Domini Social Bond fund
  
  While the SRI bond arena has few real standouts -- Parnassus In-
  come, with Ahlsten as the new manager, has been a strong perform-
  er in the past -- the relatively new Domini Social Bond fund
  (Ticker: DSBFX) is a decent, low-cost way to get fixed-income ex-
  posure through the SRI world.
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=DSEFX
  
  How does a fund screen for do-gooder bonds? Well, the Domini fund
  avoids U.S. Treasuries "because they finance the purchase of
  weapons of mass destruction," according to Domini's Web site. It
  does invest in other federal agencies, such as housing agencies.
  The fund's 9.57% average annual return over the past three years
  ranks in the top 39% of all intermediate bond funds, and the ex-
  pense ratio is 0.95%, slightly below the 1.02% category average.
  
  While there may be better fixed-income offerings in the non-SRI
  fund arena, Domini Social Bond is a decent way to go for those
  set on doing the right thing while they put their money to work.
  
  5. Indexer's Choice: Domini Social Equity Index or Vanguard Cal-
  vert Social Index
  
  For investors who like the virtues of low-cost index funds cou-
  pled with the virtues of socially responsible investing, there
  are two decent options.
  
  The Domini Social Equity Fund (Ticker: DSEFX) mirrors the Domini
  400 Social Index, an SRI index of 400 companies that pass screens
  for environment and social issues -- no guns, no cigarettes, no
  nuclear power, no alcohol, no gambling, no weapons contractors,
  on the no-no list; environmental-friendliness, good workplace and
  community activism are among the do-good list. The nice thing
  about the fund is that its 10-year average annual return of 9.42%
  a year is about a half-percentage point shy of the S&P 500, rank-
  ing the fund in the top 33% of all large-blend funds. The expense
  ratio of 0.92% is above most traditional index funds, but is
  lower than the average fund.
  
  The newer option is the Vanguard Calvert Social Index fund (Tick-
  er: VCSIX). The fund, which tracks the Calvert Social Index
  (similar to the Domini index), has only been around since May
  2000 -- its 13% average annual loss ranks in the top 19% of all
  large-growth funds, according to Morningstar.
  
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=VCSIX
  
  The clear advantage over Domini's longer history is the price:
  Thanks in part to Vanguard, the fund sports a bargain-basement
  0.25% expense ratio. While both funds count Microsoft as the big-
  gest holding, the Vanguard Calvert fund is a bit more inclined
  towards growth, according to Morningstar.

response 2 of 104:

Jun 23 20:54 UTC 2003

You think like a drug dealer.  

response 4 of 104:

Jun 24 03:29 UTC 2003

re resp:2: I disagree that I think like a drug dealer.  I don't seek 
out someone else to spend my money to promote what they think is the 
good of society.  If I go to a restaurant, I go there for lunch.  If I 
go to a financial planner, I go to make money.  If I want to promote 
the good of society, I am perfectly capable of sending my money myself 
to where I think it will do the most good as I define "good".

re resp:3: You don't believe in drugs?  I believe the pharmaceutical 
industry probably contributed more to the "good of society" (by doing 
what would make them money) than just about any other industry in the 
20th century.  The eradication of polio and smallpox, for two obvious 
examples, were enormously beneficial.  I'm hoping someone makes 
themselves rich by finding a cure for AIDS.

response 6 of 104:

Jun 24 06:39 UTC 2003

I'm amused that anyone could think that liberals have a monopoly on "social
responsibility."

response 8 of 104:

Jun 24 08:35 UTC 2003

re#3: You invest in ebay?  Me to.  I think its a pretty good investment
in spite of it being the largest "Fencing Operation" in the world. (By
its own published statistics it has way more criminal operations
(auctions) going on at any given time than even the chicago mob in its
prime and its all "legal".  I figure "caveat emptor" for the moment.
re#2: No, he thinks like a free market capitalist. The drug dealer is a
monopolist who not only kills his customers but uses force to prevent
competing vendors.  (witness Micro$oft)  The difference is merely the
economy of scale.  "What is reprehensible in the small scale is
admirable on the large."  (Although, I dumped Micro$oft as its business
model was no longer viable in my opinion, too many of the addicts
stopped buying the product or working for future returns instead of real
wages - no complaints on the ROI.)
re#7: and UPS doesn't use airplanes, cars or large vans running on
petrochemicals?  What planet you live on?  And the story about the alarm
clocks dates from a 1960's novel written about the US automobile
industry as I recall. 

response 10 of 104:

Jun 24 12:48 UTC 2003

re resp:9: I would not choose to support a tobacco company to make 
money for myself, if that's what you're asking.

If I could have a mutual fund which included a list of companies I am 
willing to support, those I am not, those I prefer, etc., then I 
wouldn't allow my money to go to any tobacco companies.  I wouldn't 
pick Coca Cola, either.

The mutual funds from which I can pick don't work that way.  A couple 
are "socially responsible", which means they say they follow a list of 
criteria which sound glowingly pleasant.  I don't assume that their 
choices are necessarily *my* choices.  I imagine they're cheerfully 
funding companies which provide abortions in 3rd world countries, 
giving preference to companies which fund Greenpeace and PETA, and 
generally funding activism which I oppose.

How about you?  Would you pick "socially responsible" if you thought 
some of the companies were on the list because they did things you 
strongly opposed?

response 12 of 104:

Jun 24 14:14 UTC 2003

Judging from a quick google on "Christian investment", yes.

response 14 of 104:

Jun 24 21:17 UTC 2003

Re: #10  Absolutely.  I also voted for my U of M retirement 
funds to not invest in companies that produce cigarettes.

It's very easy to have a social conscience and invest
in good stocks and bonds.  If you want to.

response 16 of 104:

Jun 24 23:46 UTC 2003

Quite recently tobacco use was overwhelmingly socially acceptable. It
isn't that tobacco companies "sins" have caught up with them, but rather
they have moved into new definitions of "sins". 

response 18 of 104:

Jun 25 02:06 UTC 2003

re resp:14: I may not have made my question clear.  Would you invest 
in a "socially responsible" fund which you thought might be picking 
companies who favored things you strongly opposed?  You know, Domino's 
Pizza, Amway, RJR/Nabisco, companies like that?

For me, "socially responsible" means "politically inclined against 
me".  The people who seem to me to be most likely to pick something 
called "socially responsible" are people like you... and, um, I would 
imagine, in elections of wide enough scope that we both vote, we 
cancel each other's votes most of the time.  I very rarely agree with 
you on political issues.

It's foolish to pick ways to spend your money that are designed to 
oppose what you want.  I would rather pick mutual funds that are 
neutral, rather than ones selected to go against me.

I imagine my point is understood if it's ever going to be.

response 20 of 104:

Jun 25 11:44 UTC 2003

Sindi, I don't like the tobacco companies either.  I've got kids, and 
I hate the idea of them becoming smokers.  I'm not exactly in favor of 
sending the tobacco companies overseas to attack the children of other 
countries, either.

Struggle with this idea for a bit, just to humor me: imagine that 
Nabisco does something that really excites those who pick "socially 
responsible" companies.  I'm not going to specify what because this is 
hypothetical, and you might argue with whatever example I made up.  
(Nabisco itself is a hypothetical example, and you're arguing with it, 
so that's why I think that could happen.)  Imagine Nabisco does 
something marvelous and exciting.  Then you find your "socially 
responsible" mutual fund has started buying Nabisco, even though 
Nabisco is a tobacco company.  What would you do at that point?

I don't play the "socially responsible investing" game because this 
sort of thing is pretty likely to happen to me.  It's not going to 
happen with Nabisco, my hypothetical example, but it seems likely that 
a "socially responsible" fund is going to pick things that are as 
repugnant to me as Nabisco would be to you.

I don't invest to make social statements.  I'm not much interested in 
investing and the stock market anyway, which is why I use mutual funds 
in the first place.  I'd have to get a whole lot more interested than 
I am to seek out mutual funds which have the right attitude for my 
preferences.

Sigh.  I guess as long as someone is willing and able to mis-portray 
what I say, I'm willing or compelled to explain myself again and 
again, forever.  I wonder if this disorder is treatable.

response 22 of 104:

Jun 25 12:31 UTC 2003

Actually, I'm just curious what sorts of investments you'd find repugnant,
jep.  A quick web search shows that the "socially responsible" investments
avoid tobacco, arms, nuclear issues, gambling, pollution, animal testing
abortion (presumably anti-abortion companies, or perhaps companies that
actually have a position on abortion at all).  

I'm not trying to make a point or set you up, I'm just curious.

response 24 of 104:

Jun 25 13:50 UTC 2003

Re #22:  Actually, if they take an anti-choice position on abortion, I
         wouldn't want to support them.