Jeff Tjornehoj on "Business for Breakfast" 1060 KRCN Tuesday, August 29, 2006 - Socially Responsible Investing
Q: It's been awhile since we last talked about socially responsibleinvesting--what does that term mean and why do some people consider itimportant?A: Socially responsible investing--or SRI--is the practice of following aninvestment strategy (say, large-cap growth), then building a portfoliobased on social and/or moral judgments of that type of company. So, amanager might start with 100 companies he considers large-cap growth; thenhe removes the ones posing a moral conflict. What's left is his investableuniverse.
Q: A "moral conflict," huh? Whose morals are we talking about here?
A: Well, that's a key consideration. Advisors of these kinds of funds havea set of criteria they follow. Sometimes the criteria are based onreligious grounds; sometimes they're not. You'll find funds that associatewith a variety of Christian denominations, as well as Muslim ones, andcertainly secular ones: these tend to take more consideration ofenvironmental records and workplace practices. Funds associated with aparticular religion are not proselytizers, though: they don't tellinvestors, "Jesus likes low price-to-book stocks."
Q: But are their portfolios that different?
A: By and large, no matter which type (religious or secular) you look at,you'll find tobacco, gambling, alcohol, and weapons manufacturers areexcluded. One important debate going on in the SRI community is how much acompany can be involved in one of those businesses before it is excluded.For instance, Starbucks was a popular holding for some of these kinds offunds before it started selling a coffee liqueur. Now the question is: isStarbucks in the alcohol industry or not? And what about media companiesthat sponsor fantasy football leagues: gambling or not? There's a lot ofsubjectivity here, and the funds definitely are not all alike.
Q: The big question on my mind is, how well do they perform?
A: If you go to the Web sites of these funds, you'll probably see somereference to "doing well while doing good." That sounds admirable, but I'dbe skeptical about both points. First, companies aren't hurt when a groupof fund investors avoids their stock; they're not helped, either--companiesdon't get any money from investors buying their stocks from otherinvestors. And second, there's not much evidence to support the claim thatstocks with or without good environmental records, for instance, alwaysoutperform--these things vary over time.
A good indicator of the funds' performance is their assets: rationalinvestors won't look past a manager's talent regardless of his/her moraljudgments on stocks. And after the decades these funds have been around,they currently comprise about one-half of 1% of all mutual fund assets--about $4.36 of every $1,000 invested in all funds.
Q: Yeah, that's not very much.
A: Yep. I think a lot of people don't have the motivation or need to feelmorally indignant about certain companies and industries. But there aresome interesting options out there for those who do.
Q: Great, thanks again, Jeff.
A: You bet.
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