In other words, don't invest in companies run by liars and cheaters, but feel free to buy tobacco and liquor stocks even if you disapprove of what they do for a living. Make as much money as you can.
Not long ago, ethical investing was considered an eccentricity or even a joke. No longer. In the first three months of this year, U.S. investors took $13 billion out of conventional stock mutual funds and put $185 million into funds with assets deemed ethically or environmentally responsible. There are now more than 200 such funds. Most are tiny, but 18 have more than $100 million in assets and four have more than $1 billion.
At a time of scandals in business, government, religion and journalism (just to mention a few large institutions), it's not hard to understand why people search for ethically pure -- or at least not ethically impure -places to put their money. And, as it turns out, you can have your ethical cake and eat it, too.
The Domini Social Index 400, which tracks the performance of companies that pass a series of moral screens, returned an annual average of 9.64 percent for the 10 years ending April 30. The return of the benchmark Standard & Poor's 500-Stock Index over this period was almost precisely the same: 9.66 percent.
Overall, $13 billion is invested in U.S. public mutual funds that focus on socially responsible investing, or SRI. That's about one-half of one percent of total mutual-fund assets, but it understates the impact of this kind of investing, since far more money (though it's impossible to say how much) is invested worldwide in privately managed SRI accounts.
But there is one enormous problem with SRI. Ethics, social responsibility, environmental stewardship -- whatever terms you want to use -- are exquisitely personal. How can an index or a mutual fund or a financial adviser tell you what's moral and what's not?
Different people have different notions. The Domini index automatically excludes companies that make alcohol, tobacco, or firearms; that offer gambling or operate nuclear power plants; or that earn "two percent or more of sales from military weapons." Analysts at Kinder, Lydenberg Domini & Co., which compiles the index, also bump companies with poor records in "the environment, diversity, employee relations and product."
In my view, companies that make weapons that help defend the United States are doing a good thing, not a bad thing. Also, I think that nuclear power is a clean, efficient way to produce electricity that improves peoples lives and that gambling is a completely legitimate means of entertainment for adults. But that's just me. Other investors disagree, of course. Why, however, would anyone want to own a mutual fund like Domini Social Equity (DSEFX), which is based on the index itself and eliminates stocks based on Domini's judgment of what's ethical?
But a lot of people own such funds. Domini had, at last count, $1.2 billion in assets -- up from just $69 million in 1995. Another popular SRI fund, Dreyfus Premier Third Century (DRTHX), which eliminates companies judged to have poor records on the environment and worker safety, has $565 million in assets. Parnassus (PARNX), started in 1985 and one of my long-time favorites, has whipped the S&P soundly over the past five years and manages $300 million.
Another large fund, Calvert Social Investment Equity (CSIEX), part of a large family of ethical funds based in Bethesda, Md., uses Domini-like criteria and, according to Morningstar, "just started to screen on corporate-governance issues that include such items as executive compensation and shareholder involvement."
Despite what appear to be tough-minded criteria, Domini, which is the dominant index, influencing many of the funds, eliminates surprisingly few large companies. The biggest include Altria (MO), which soared last week on news of a court victory by its Philip Morris tobacco division; ExxonMobil (XOM), the world's largest energy company; Boeing (BA), which makes combat, as well as commercial, aircraft; and General Electric (GE), the company with the largest market capitalization in the world. GE's apparent offenses include manufacturing engines for military jets and turbines for nuclear plants. Apparently, it gets no offsetting credits for making computer-tomography scanners that find disease unobtrusively.
The Calvert fund, whose managers have more leeway, produced terrible returns between 1993 and 1998, trailing the S&P in every year and four times by more than 13 percent. Calvert Social, in fact, was typical of SRI funds of that early generation. It was poorly managed.
Performance improved sharply when the firm hired Daniel W. Boone in 1998. Since then, the fund has returned an incredible average of 11 percent annually at a time when most investors were doing well just to break even.
There's another approach to social investing, described by Michael Prowse of Britain's Financial Times: The role of the corporation "is to provide individuals with the means to be socially responsible. Rather than trying to play the role of social worker, senior executives should concentrate on their statutory obligations. We should not expect benevolence of them, but we should demand probity."
In other words, don't invest in companies run by liars and cheaters, but feel free to buy tobacco and liquor stocks even if you disapprove of what they do for a living. Make as much money as you can.
http://www.theledger.com/apps/pbcs.dll/article?AID=/20030601/NEWS/306010363/1001/BUSINESS
Not long ago, ethical investing was considered an eccentricity or even a joke. No longer. In the first three months of this year, U.S. investors took $13 billion out of conventional stock mutual funds and put $185 million into funds with assets deemed ethically or environmentally responsible. There are now more than 200 such funds. Most are tiny, but 18 have more than $100 million in assets and four have more than $1 billion.
At a time of scandals in business, government, religion and journalism (just to mention a few large institutions), it's not hard to understand why people search for ethically pure -- or at least not ethically impure -places to put their money. And, as it turns out, you can have your ethical cake and eat it, too.
The Domini Social Index 400, which tracks the performance of companies that pass a series of moral screens, returned an annual average of 9.64 percent for the 10 years ending April 30. The return of the benchmark Standard & Poor's 500-Stock Index over this period was almost precisely the same: 9.66 percent.
Overall, $13 billion is invested in U.S. public mutual funds that focus on socially responsible investing, or SRI. That's about one-half of one percent of total mutual-fund assets, but it understates the impact of this kind of investing, since far more money (though it's impossible to say how much) is invested worldwide in privately managed SRI accounts.
But there is one enormous problem with SRI. Ethics, social responsibility, environmental stewardship -- whatever terms you want to use -- are exquisitely personal. How can an index or a mutual fund or a financial adviser tell you what's moral and what's not?
Different people have different notions. The Domini index automatically excludes companies that make alcohol, tobacco, or firearms; that offer gambling or operate nuclear power plants; or that earn "two percent or more of sales from military weapons." Analysts at Kinder, Lydenberg Domini & Co., which compiles the index, also bump companies with poor records in "the environment, diversity, employee relations and product."
In my view, companies that make weapons that help defend the United States are doing a good thing, not a bad thing. Also, I think that nuclear power is a clean, efficient way to produce electricity that improves peoples lives and that gambling is a completely legitimate means of entertainment for adults. But that's just me. Other investors disagree, of course. Why, however, would anyone want to own a mutual fund like Domini Social Equity (DSEFX), which is based on the index itself and eliminates stocks based on Domini's judgment of what's ethical?
But a lot of people own such funds. Domini had, at last count, $1.2 billion in assets -- up from just $69 million in 1995. Another popular SRI fund, Dreyfus Premier Third Century (DRTHX), which eliminates companies judged to have poor records on the environment and worker safety, has $565 million in assets. Parnassus (PARNX), started in 1985 and one of my long-time favorites, has whipped the S&P soundly over the past five years and manages $300 million.
Another large fund, Calvert Social Investment Equity (CSIEX), part of a large family of ethical funds based in Bethesda, Md., uses Domini-like criteria and, according to Morningstar, "just started to screen on corporate-governance issues that include such items as executive compensation and shareholder involvement."
Despite what appear to be tough-minded criteria, Domini, which is the dominant index, influencing many of the funds, eliminates surprisingly few large companies. The biggest include Altria (MO), which soared last week on news of a court victory by its Philip Morris tobacco division; ExxonMobil (XOM), the world's largest energy company; Boeing (BA), which makes combat, as well as commercial, aircraft; and General Electric (GE), the company with the largest market capitalization in the world. GE's apparent offenses include manufacturing engines for military jets and turbines for nuclear plants. Apparently, it gets no offsetting credits for making computer-tomography scanners that find disease unobtrusively.
The Calvert fund, whose managers have more leeway, produced terrible returns between 1993 and 1998, trailing the S&P in every year and four times by more than 13 percent. Calvert Social, in fact, was typical of SRI funds of that early generation. It was poorly managed.
Performance improved sharply when the firm hired Daniel W. Boone in 1998. Since then, the fund has returned an incredible average of 11 percent annually at a time when most investors were doing well just to break even.
There's another approach to social investing, described by Michael Prowse of Britain's Financial Times: The role of the corporation "is to provide individuals with the means to be socially responsible. Rather than trying to play the role of social worker, senior executives should concentrate on their statutory obligations. We should not expect benevolence of them, but we should demand probity."
In other words, don't invest in companies run by liars and cheaters, but feel free to buy tobacco and liquor stocks even if you disapprove of what they do for a living. Make as much money as you can.
http://www.theledger.com/apps/pbcs.dll/article?AID=/20030601/NEWS/306010363/1001/BUSINESS
