Here’s how you can be socially responsible when investing in your 401(k), mutual funds or stocks
By Kerry Hannon
Originally Posted On May 18, 2013
Kerry Hannon has spent more than 25 years covering personal finance for Forbes, Money, U.S. News & World Report and USA Today. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.
Does it trouble you to invest in a company that makes guns? If so, you might want to take a closer look at your 401(k) — there’s a reasonable chance that a gun manufacturer is among your mutual fund holdings.
I’m talking about Smith & Wesson, whose shares are publicly traded. The stock is standard fare in several market indexes, which means it’s in many index funds and 401(k) index fund accounts, as well as other funds, exchange-traded funds, or ETFs, and retirement plans whose managers choose stocks selectively.
Where Gun Company Stocks Are Hiding
A recent New York Times article by Jeff Sommer, “The Guns Hiding in Your Portfolio,” got me thinking about this. According to Sommer, mutual fund giant Vanguard is the biggest single investor in Smith & Wesson; BlackRock, the ETF titan, is No. 2.
To be clear, I’m not saying there is anything wrong with owning Smith & Wesson stock. Over the long haul, it has outperformed the overall market by a vast margin, according to Sommer.
Should You be a Socially Conscious Investor?
But if it would upset you to hold that stock after the rash of shooting incidents, you should adopt a socially conscious investment strategy. Guns, of course, aren't the only consideration. Perhaps you'd prefer not to own shares in a rampant polluter, a corporation with terrible labor-relations policies or a company that profits from tobacco, alcohol or gambling.
My female friends and I often talk about the merits of investing with a conscience when a company makes news for doing bad things. Think of BP and its horrific Gulf of Mexico oil spill.
Rarely, if ever, though, do we analyze our mutual fund statements to see if we actually own shares in such companies. (The answer, most likely, is yes.)
What My Girlfriends Said
After I read the Times article, I decided to informally canvass my girlfriends to see how they felt about investing inadvertently in weapons makers or companies that make other products they may consider taboo.
Most had a kneejerk reaction, blurting out the politically correct view: “I wouldn't dream of it.” But when I pressed them, the answer became: “It depends.”
They (and I) wouldn’t buy the stock directly, but if it was part of a basket filled with lots of others in a mutual fund or 401(k), that somehow seemed less problematic.
It’s tricky terrain.
But the takeaway was that we really want to invest in companies that are doing the right thing when it comes to everything from global warming to proper workplace conditions. We believe our choices in the long run can make a difference by supporting those kind of white-hat businesses.
Plenty of investors feel the same way.
Socially Responsible Investing on the Rise
Investments adhering to environmental, social and corporate governance, or ESG, criteria account for more than $3.7 trillion, a 22 percent increase in the two years ending in 2011, according to a study by the US SIF Foundation, a Washington-based group that tracks this type of investing.
What About Investment Returns?
And you don’t have to sacrifice returns in your portfolio to be a socially conscious investor. The MSCI KLD 400 Social Index, a socially responsible benchmark, had a 4.51 percent annualized return over the past five years. That was slightly better than the 4.14 percent return for the comparable MSCI USA index, which doesn't use such a screen.
Calvert Equity, one of the largest and oldest socially responsible mutual funds, gained 5.97 percent annually, on average, over the past five years; the iShares MSCI USA ESG Select Index, an ETF that tracks companies based on their environmental, social and governance standards, returned 4.5 percent.
One Drawback for Investors
But know this: Fees charged by socially responsible funds are often higher than their agnostic brethren, presumably because it costs more to sort out the good guys. For example, the plain-vanilla Vanguard Investor Shares 500 Index has an expense ratio of 0.17 percent while the Vanguard FTSE Social Index Fund Investor Shares’s expense ratio is 0.29 percent. (Incidentally, 0.29 percent is still pretty low.)
3 Ways to Invest In Socially Responsibly Ways
Interested in investing in your core values? Here are three ways to do it:
Look for actively managed, socially responsible mutual funds. There are hundreds of these funds, whose skippers decide which stocks to buy and sell. The major fund companies offering them include Ariel, Calvert, Domini, Neuberger Berman, Parnassus, Pax and TIAA-CREF.
Each of these funds has its own rules regarding the types of companies it won’t own. Some exclude nuclear power, for instance, while others shun firms that do animal testing.
Socially responsible fund managers don’t just decide which stocks not to buy. They may also specifically purchase shares of companies that invest in their local communities.
So before you choose an actively managed socially responsible fund, you’ll want to see whether its guidelines match yours.
The personal finance site Social Funds is a great place to start your research. You can find fund profiles screened by your criteria, sign up for news alerts and get a prospectus.
I’d also suggest visiting the Morningstar site to drill down on a fund’s latest holdings, along with its fees and performance.
Check out index funds. I personally prefer these investments because they run on autopilot, buying a basket of stocks and holding onto them. Another plus: index funds typically have lower fees than actively managed funds.
Each fund, however, may have a different strategy. For example, the Calvert Social Index Fund (minimum investment: $5,000; $2,000 for an IRA) starts with the 1,000 largest U.S. companies then whittles them down by analyzing their suitability in: governance and ethics; environment; workplace; product safety and impact; community relations; international operations and human rights; and indigenous peoples' rights.
Calvert Social Index Fund currently holds 675 stocks. This month, it voted to add Walt Disney because the company “now meets the Index's standards for workplace safety.”
By contrast, Vanguard’s Social Index Fund (minimum investment: $3,000) focuses on large-growth and mid-cap stocks, like Google, J.P. Morgan Chase and Johnson & Johnson.
Look for impact investments. With this strategy, you buy stocks of up-and-coming do-gooder companies or join other investors who pool their money into a fund earmarked to hold shares of one or more new businesses aiming to make a difference.
Becoming a mini venture capitalist is typically reserved for the well-heeled, though.
For instance, members of Investors’ Circle Network, an impact investing outfit I’ve followed for years, typically put in $10,000 to $5 million apiece. The network is made up of angel investors, professional venture capitalists, foundations and others. Since 1992, the Investors’ Circle has poured more than $152 million into roughly 250 companies and small funds addressing social and environmental issues.
Where I’ve Wound Up
I admit that I’ve invested unwittingly in undesirable firms through my mutual funds. But until the whole gun issue came up, it really hadn’t upset me much. I focus on performance and those tainted holdings are a tiny fraction of my overall portfolio (I checked).
I choose to be socially responsible in other ways. For instance, I donate a percentage of my savings each year to charitable causes that mean a lot to me.
That said, I’ve now vowed to try to add at least one socially responsible mutual fund to my IRA this year, providing I can find one that meets my criteria and has reasonable fees.