Investors who consider themselves and their strategies to be socially responsible may be taking more risks with their own financial futures than their more diversified friends and neighbors, according to a new study by Morningstar.
That's because so-called "socially responsible" investors tend to eschew companies that pollute, have unenlightened labor practices or sell alcohol, guns, tobacco, nuclear products, gambling or weapons. Take out all of those companies and what's left of the investing universe? Tech stocks. And those tech stocks, as anybody who has been keeping half an eye on Wall Street knows, are very volatile.
That explains a lot about what's been happening to those funds (there are now more than 200) that claim to be socially responsible and follow those guidelines.
According to Morningstar, those funds were, on average, besting their more broad-based competitors in 1999, when tech mania ruled. But so far this year, they are lagging. The two major socially responsible index funds, the Domini Social Equity Index and the Citizens Index, are losing 12.68 percent and 6.08 percent, respectively, on a year-to-date basis, while the average large cap fund is eking out positive returns.
Furthermore, experts at Morningstar are raising questions about whether the social screens used by socially conscious fund managers and individual money managers are a little out of date. Many of these funds, for example, hold buckets of Microsoft shares.
"Mr. Softee has been their meal ticket," say analysts Russel Kinnel and Catherine Hickey. But shouldn't ethical investors be concerned about companies that violate antitrust laws? Or skimp on their taxes? Or play politics with their money?
"They might have to come to grips with companies that might not pollute but are simply bullies," the Morningstar analysts say.
Individual investors who like to put their money where their consciences are have some options for smoothing out their portfolio performances and keeping their ethics intact. They can balance their volatile fund investments by having a slightly lower portion of their money in stock funds, and investing more in bonds that governments float to do good works, or in money funds issued by the fund companies that specialize in social investment or in certificates of deposit of community development banks that focus on local and socially-positive investments.
Socially-conscious investors can also start stock picking for at least a portion of their portfolios. A new Web site, socialfunds.com (http://www.socialfunds.com), includes social-screen data on some 1,000 of the largest stock market-listed companies, as well as details on ethically-screened mutual funds and the like.
Investors who fear that their screened stock fund is too heavy in techs can look for some old-line firms that don't violate the social screens of their choice. Or mine for companies that go out of their way to invest in communities, offer family-friendly benefits and the like. They can also pick and choose their own stocks to fit their own screens. Not every environmentally-focused investor is against alcohol production or weapons production, for example.
It's a site likely to get a lot of traffic. In the last few years, social investment has mushroomed and now totals more than $2 trillion, or about 13 percent of all money invested via professional managers.
Anyone who is interested in learning more about social investment now has many sources of information. They can check out the Social Investment Forum at http://www.socialinvest.org, or get information from one of the founders of the modern social investment movement at http://www.domini.com.
(Linda Stern is a freelance writer who covers personal finance issues for Reuters. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com).