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April, 2010

FAVOR BUT DO NOT DISFAVOR - A FRESH LOOK AT SOCIAL INVESTING
by LARRY

Can one invest with a sense of social responsibility and still do better than the market averages? That is the question answered in a new article in the American Association of Individual Investors (AAII) Journal, "Does Social Investing Generate Higher Returns?" by Meir Statman and Denys Glushkov (in AAII's April, 2010 issue, Vol. XXXII, No. 4, pp. 13-16). Social investing involves favoring in one's investing approach the shares of companies that get high marks for such social responsibility themes as "going green," avoiding "sin" (for instance selecting for companies not engaged in gambling, the promotion of smoking, military support, or bad environmental policies as means to their primary profits), doing good for one's community, or encouraging of positive employee relations. Typically it also means not investing in or disfavoring the shares of companies that do "sin" in various ways from a social responsibility standpoint. There are mutual funds that focus mainly on one or another form of social investing. The individual investor may also make her or his stock selections based on socially responsible criteria.

Since we all like to think of ourselves as good people, who would not want to be a social investor if the returns are as good or better by doing so? It turns out, though, per the AAII article, that things are a little more complicated than that. If one screens only for one criterion of social investing, for example focusing on companies that have good records for employee relations, the stocks of corporations like Starbucks that consistently in the past have been scored superior in terms of employee satisfaction, the returns do tend to be better than, say, the record of the S&P 500 Index. But if several socially responsible criteria are added into the mix and one screens out the companies that do not measure up, alas, the returns are often significantly lower than a major market average like the S&P 500.

Also, there are any number of combinations of criteria that can be used for the selection or rejection of socially responsible vs. socially irresponsible companies' stock. One person's socially responsible corporation, perhaps a start-up enterprise that turns guns into plowshares (the metal blade portion of a plow), may be lauded by some but decried by others, i.e. folks who believe more people ought to own guns. A nuclear plant utility might be considered good by those who believe we cannot reach state, national, or global green energy targets without a substantial portion of our electricity coming from the nuclear option, while others, maybe remembering Three Mile Island, Chernobyl, or that we still have no practical means of dealing with nuclear waste, might believe investments in nuclear utilities are about as responsible as a deal with the devil.



There are also different ways to actually do social investing. Some screen out; some screen in; some invest in "greener" communities or regions while excluding others (think maybe Silicon Valley vs. Detroit); some focus on shareholder advocacy; some cherry pick a handful of really "bad" companies to exclude while others avoid whole sectors; some select companies that do nice things for the places where they are in operation (perhaps building and donating hospitals, community centers, or parks), etc.


Social Investing Candidates

CompanySymbolRecent
Price
Apple, Inc.AAPL$243.41
Cisco Systems, Inc.CSCO$27.14
Gilead Sciences, Inc.GILD$45.68
Hewlett-Packard Co.HPQ$53.41
Johnson & JohnsonJNJ$65.92
Microsoft Corp.MSFT$31.20
Pepsico, Inc.PEP$65.97
Proctor & GamblePG$63.17
Stryker Corp.SYK$58.22
Sysco Corp.SYY$30.43



Statman's and Glushkov's researches revealed, though, that, in general, with the exception of one or two specific screens, such as not buying shares of low employee morale companies, when one restricts the number of potential purchase candidates using socially responsible criteria, shunning companies like Phillip Morris, Jim Beam, or corporations engaged in gambling, firearms, or military operations, etc., the result is to significantly lower returns.

On the other hand, when one focuses on buying the shares of companies whose overall operations are regarded as "good," the happy consequence is that the performance of one's shares tends to be significantly better than the major market averages.

As a cynic might have opined before the article authors began to look into these issues, the benefits to one's returns of a strategy of picking "good" companies are essentially offset by the liabilities of screening out the "bad" companies, giving many social investing approaches a net "no effect" (neither an advantage nor a disadvantage over market averages) performance grade.



Nonetheless, the authors convincingly suggest the findings support a strategy that emphasizes the positive while not succumbing to the negative. Simply buy more shares of the best companies that meet one or more social responsibility criteria, taking advantage of their statistically higher stock market returns. Yet do not screen out companies, even those most clearly associated with "bad" behavior, such as Exxon, since to do so would diminish one's overall returns. The approach reminds of the adage that one gets more by offering honey than vinegar, praise being a superior motivator relative to criticism, or, in this case, by favoring but not disfavoring.

For those interested in trying out social investing, I have included in the table my own picks of the top-ten socially responsible companies. These are not necessarily the best in terms of their contributions to our health and well-being, but, among those meeting generally accepted social responsibility criteria, they appear to me to more profitable than average while also carrying less debt than is typical.



DISCLAIMER

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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