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Dollars and conscience
By Gene Walden
From the Minneapolis StarTribune

You don't have to sacrifice performance to put a little heart into your investment portfolio. Ethical investing has been a popular notion for a couple of decades now--long enough for researchers to prove that even investors who take the moral high ground can make a bundle in the market. 

The Domini 400 Index (DSI), a basket of 400 socially responsible stocks, has actually outperformed the Standard and Poor’s 500 Index since its inception in 1990. During its first 15 years, beginning May 1, 1990, the DSI posted a total return of 439 percent versus a total return of just 382 percent for the S&P 500.

Ethical investing has become big business. Once the domain of just a handful of funds, such as the PAX World Balanced Fund (launched in 1971) and the Calvert Social Investment Fund (launched in 1987), there are now dozens of ethical funds on the market, according to Brad Smegal and Dave Horan, Piper Jaffrey advisors who specialize in ethical investing.

The mission of these funds is to invest in a portfolio of stocks that meet a strict set of ethical screens. They typically screen out companies that deal in tobacco, alcohol, weapons, gambling, and nuclear power, and may also screen out firms that do testing on animals or have poor environmental records. That may include oil and chemical companies, paper and lumber companies, pharmaceutical makers, and heavy manufacturers that spew out excess emissions.

Some funds even go a step further—not only screening out the corporate villains, but emphasizing firms that make a positive impact, such as solar panel and ethanol makers.

The beauty of these funds is that you can reap a good return on your investments without compromising your personal principals.

Not to kick sand in Santa Claus’s face, however, I still can’t help thinking that investing in ethical funds is, well . . . (I’m searching for the right words here…oh, the heck with it) . . . little more than a bunch of feel-good nonsense. (I can already see the angry emails piling up). In fact, I would guess that at least 90 percent of ethical fund investors—as well as the people who run the funds—spend some of their investment profits on products produced by many of the very companies that are banned from the funds.

For instance, next time you get a splitting headache, a cold, or the flu, tough it out without the pills. In fact, maybe you should also stop taking your heart and blood pressure medicine and your other life-saving medications. They were probably made by companies that use animal testing in their research.

And next time you need to go across town or across the country, try walking or riding your bike. You wouldn’t want to give any money to those pesky oil companies that run the refineries. And while you’re at it, no more wine or booze, no trips to Vegas, and definitely no meat or fish for dinner. In fact, you better turn off the heat and electricity in your home because it may be fueled by nuclear power or pollution-causing fuels.

Don’t get me wrong. Ethical investing can be a noble gesture, but does it really make sense to let a mutual fund manager serve as your social conscience? If you want to do it right, pick your own portfolio. Don’t drink or smoke? Screen out the alcohol and tobacco companies. You want to see more alternative energy? Buy stocks of solar and wind power companies. You don’t gamble? Don’t buy casino stocks. Down on manufacturers that pollute? Avoid those stocks—and the products they produce.

In fact, there’s a growing trend in the investment industry toward separately managed portfolios that are specially tailored to the client’s social sensibilities. “We can customize our screens to coincide with the values of our clients,” says Horan.

“We can also put a greater emphasis on rewarding companies that are making positive changes,” adds Smegal. For instance, Dell Computer has gotten high marks for coming up with a policy that reduces landfill toxins from discarded computers. That nod to the environment has helped land Dell in a lot of socially-conscious portfolios.

You probably won’t save the world with your investment decisions, but you can help reward the companies that take an ethical approach to their business practices. And you can cash your checks with a clear conscience.

Local Favorites
Three Minnesota companies have made the list of “The 100 Best Corporate Citizens” for the past five consecutive years. Those companies include Ecolab, Graco and St. Paul Travelers. Three others also made the list in 2005—General Mills, Apogee Enterprises and Synovis Life Technologies.

The annual list is put together by Business Ethics Magazine. The publication judges companies based on environmental policies, community relations, employee relations, diversity, and customer relations.

Top Funds
Here are two of the top-performing socially responsible mutual funds:

The PAX World Balanced Fund (PAXWX) is up about 33 percent the past three years. It has no load, an annual expense ratio of about 1 percent, and a minimum initial investment requirement of $250.

The Calvert Large Cap Growth Fund (CLBAX) is up about 72 percent the past three years. The fund has a 4.75 percent front end load, an annual expense ratio of about 1.55 percent, and a minimum investment requirement of $2,000.

 

 






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