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October, 2005


As my sister, Jeanine, has pointed out, some see the allocation of their hard-earned money not simply as a practical personal matter but as a conscious political one as well. Discriminating investors often want a say in how their dollars are spent. A growing number of them feel that, at least collectively, their assets have clout and should be used for relatively benign purposes.

Some may be down on tobacco companies, others defense industries, gun manufacturers, meat processing corporations, companies associated internationally with child labor infractions, corrupt executives or governments, scantily clad waitresses, stem cell research, gambling, alcohol, apartheid practices, etc.

Sometimes, in fact, disparate values lead to supporting or avoiding competing moral interests: pro and con abortion research and practices, specific foreign military involvements, environmental initiatives, gay rights, birth control, racial and gender equity, and so forth.

An entire class of mutual funds has evolved that caters to the sometimes meshing and at others competing interests of ethically sensitive individuals and groups. "Socially responsible investing" (or SRI) funds had over $2 trillion in assets in 2003, spread among 200 or more mutual funds. Today those figures are almost certainly higher.

A question that comes up is whether the total returns of SRI funds match or even exceed those of their more morally challenged cousins, who do not limit their choices of investments based on ethical criteria. The answer is complicated, the results mixed.

Intuitively, one would assume worse results for the SRI genre because the number of acceptable investment assets is substantially smaller than the pool available to other mutual funds. Doubtless some of the excluded companies would have significant profits and per share price increases.

And, indeed, over most of their history, the majority of SRI fund managers have underperformed their less ethically sensitive mutual fund peers. There are exceptions, however. By virtue of their higher concentration in technology and other fresh, non-manufacturing businesses in the late 1990s, the Domini 400 Social Index (a portfolio of 400 securities generally acceptable under SRI guidelines) performed better than the more eclectically invested universe of mutual funds. And last year a handful of SRI funds beat the average mutual fund industry returns, though many more did not. Taken together, though, factoring in the exceptional periods of SRI outperformance and those socially responsible funds that have had superior records, the mean total return of all SRI mutual funds turns out to be about the same as that of non-SRI funds.

In fact, if investing were restricted to the Domini 400 Social Index companies, from January, 1990, through April, 2005, the value of each dollar invested would have risen to about $5.60 vs. $5.10 for either the S&P 500 or Russell 1000 indexes.

So, for those who feel strongly investments should be limited to the stocks of arguably more moral companies, a case can be made that one can accomplish this without great cost to performance.

It seems, though, that with SRI investing it is more than usually important to pick mutual funds carefully. Two of the best SRI mutual fund families are Ariel (800-292-7435) and Calvert (800-368-2745). Not coincidentally, my sister endorses The Calvert Group's SRI offerings and philosophy, has invested her IRA assets through them, and is happy with the results.

Among the best individual SRI mutual funds, based on past performance, are Ariel Fund, for stocks (with a ten-year annualized total return of 15.01%, per Ariel Mutual Funds), and Calvert Income Fund, Class A, for bonds (with a ten-year annualized total return of 7.77%, per The Calvert Group).

Source: When Making Money Is Not Enough. Harvey Shapiro in The Rotarian, Vol. 184, No. 2, pages 18-25; August, 2005.

(My thanks to Jeanine, for providing the article on which this write-up is based, and to Curtis, whose Rotary Club membership led to its coming to her attention.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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