Net Gains: Investing With Convictions Intact

Oct. 24, 2007 — -- Every investor wants to make a killing in the market.

What they don't have in mind is the kind of killing highlighted in a powerful television ad produced by an activist group dedicated to ending genocide in Darfur.

The ad by the Save Darfur Coalition features a financial adviser telling clients they are "really making a killing" as he displays for them a portfolio of horrific photos from the Darfur region of Sudan.

The ad, meant to pressure mutual funds to divest from oil producers and other companies doing business in Sudan, illustrates the tension that can exist between strong returns and political beliefs.

Darfur is but one issue important to certain types of investors. For others, it's the environment or labor issues. And for yet others, it is abortion, gambling or tobacco.

Increasingly, investors want their portfolios to mirror their beliefs. They do not want to campaign for clean air on one hand and invest in coal-mining companies on the other.

These types of investors want to engage in what's called socially responsible investing, or SRI. With roots in the Quakers and Methodists who refused to finance the slave trade, socially responsible investing screens out companies based on certain political or ethical criteria.

Fast-Growing Segment

By one estimate from the Social Investment Forum, socially responsible funds held about $179 billion as of 2005. That was up more than tenfold from a decade earlier, according to the organization. But still it represents a sliver of the $9 trillion overall held in mutual funds at that time.

The socially responsible investing segment includes more than 200 mutual funds, the Social Investment Forum says, and it continues to expand with the introduction of exchange traded funds geared toward this investing audience.

Typically, socially responsible investing has been associated with liberal causes, such as human rights and the environment. But it also includes religious-oriented funds, many of which feature a conservative focus. These are sometimes referred to as examples of morally responsible investing, or MRI.

The LKCM Aquinas Funds, for example, seek to promote Catholic values by following investment guidelines set by the U.S. Conference of Catholic Bishops. The Aquinas Funds screen investments for policies on issues such as abortion, contraceptives, human rights, gender and race discrimination and fair employment practices. The fund managers say they will try to influence a company's practices to reflect the bishops' guidelines, and if unsuccessful they may sell the investment.

The fund research firm Morningstar calls religious mutual funds "probably the fastest-growing subset" of socially responsible investing funds.

The largest socially responsible mutual fund is Pax World Balanced, according to Morningstar. With more than $2 billion in assets, Pax World Balanced has been a top performer this year in the moderate-allocation category, which features funds that hold a mix of stocks and bonds.

The largest socially responsible fund family is Calvert, which has more than a dozen such funds, some of which are 20 years old. Other fund families that focus on social issues include Citizens, Domini and Parnassus.

Many of the major mutual fund families also offer individual socially responsible funds. There are offerings from Vanguard, TIAA-CREF, Dreyfus and Legg Mason.

On the religious side of socially responsible investing, there are funds aligned with Catholic, Protestant and Islamic beliefs. A top Catholic funds family is Ave Maria. The GuideStone funds are affiliated with Southern Baptist Convention. Islamic-oriented funds include Amana Trust Growth and Amana Income.

Finding the Fund for You

For those interested in matching their portfolio with their beliefs, where should they start?

Doug Wheat, a Northampton, Mass., financial planner who specializes in socially responsible investing, advises investors to first consider which issues are important to them and how absolute in their convictions they wish to remain.

Once a person has settled on general principles to follow, an investor should not get too hung up on exact screening procedures for broadly screened social mutual funds.

"They're all a little bit different in their criteria. It's not that big a deal unless you have some belief you want to be strict about," Wheat said.

Once done with that process, Wheat says they should consider the same factors as with other mutual funds, such as performance.

In general, socially responsible funds are higher cost than otherwise comparable funds, according to Morningstar. That is partly because of the expenses associated with the screening process and partly because many of the funds are run by smaller investment firms.

As a whole, such funds do just as well as other mutual funds over the long term, says Morningstar.

For the socially responsible investor, it is possible to construct a fairly well diversified portfolio using just these types of funds. Most major asset categories are represented in the socially responsible arena. The exceptions, said Wheat, are emerging markets and real estate funds.

Some of his favorite socially responsible funds include Neuberger Berman Socially Responsible, Pax World Balanced, Parnassus Fixed Income, Winslow Green Growth and Portfolio 21, an international fund.

To find a particular fund you might wish to invest in, there are a couple Web sites that can help. The Social Investment Forum site, www.socialinvest.org, features charts that allow investors to compare funds. The charts are handy, but they are not exhaustive as they include only funds run by companies belonging to the organization.

A second site, www.socialfunds.com, provides information on a wider range of funds, including a number of religious-oriented funds.

You might take a look if you want to be sure you're making a killing you can live with.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com