Putting Your Money Where Your Morals Are
So you say you’re against apartheid or tobacco use or the arms race. Perhaps you favor environmental cleanup or Catholic religious values. Are you willing to put your money where your morals are? Some mutual funds hope so.
More than a dozen funds now offer an “ethical” or “socially responsible” way to invest. Although they represent a small portion of the industry, these funds in recent years have become more numerous and have been able to attract a larger amount of money from the public--while trying to persuade companies to adopt more enlightened policies.
Better yet, some of these portfolios have chalked up impressive results, demonstrating that you don’t have to suffer for your beliefs. “Good companies that do the right things will outperform their competitors in the long run,” says Steve Schueth, vice president of socially responsible investing at the Calvert Group, a fund company based in Bethesda, Md.
Calvert applies some of the most rigorous standards when screening stocks for investment. The firm won’t buy bonds or shares issued by companies that do business in South Africa, generate nuclear power, degrade the environment or make weapons systems. “We’re not against defense, but we’re not in favor of offense,” Schueth explains. “We feel the country spends a disproportionate amount of GNP on the military.”
And that’s not all. Calvert further restricts its investments to companies that make safe products, offer equal opportunity to workers and meet other progressive goals. About 65% of the 1,000 largest U.S. companies meet Calvert’s standards.
Other socially responsible funds impose different sets of moral criteria, which goes to show that ethical issues are in the eyes of the beholder. For example, the managers who work for Pioneer Funds in Boston avoid only three types of companies: those in the tobacco, alcohol and gambling businesses. Philip Carret, Pioneer’s founder, started this policy about 40 years ago as a way to woo investors in religious groups.
Considering that Pioneer now ranks as one of the largest fund groups, with nearly $7 billion in assets, the policy doesn’t seem to have turned off many people. However, by limiting the number of securities in which Pioneer’s managers can invest, the policy has made their jobs tougher.
“It had the potential to hurt our performance, and it has,” admits John Carey, portfolio manager of the $1.6-billion Pioneer Fund. For example, Carey says, he has never been able to buy Anheuser-Busch or Philip Morris, two of the stronger large stocks over the past decade.
Typically, managers of ethical funds first set their sights on selecting stocks and bonds they like from an investment standpoint. Then they investigate the moral background of the corporations in which they’re interested.
The Pax World Fund, one of the best-performing ethical portfolios, asks companies to complete a six-page questionnaire detailing their policies toward South Africa, weapons production, the environment and other issues. “Fifteen years ago, when we asked a company to fill out our socially screened questionnaire, we’d get laughed at,” says Ben Lovell, administrator of Pax World in Portsmouth, N.H. “Now, companies are more helpful. Often, they want to show off their policies.”
Socially responsible funds say their biggest success has come in the fight to persuade multinational corporations to divest their South African operations. “Clearly, the stance on South Africa has had a dramatic effect on that country and on apartheid,” Lovell says.
Schueth estimates that mutual funds, pension funds and other money management outfits overseeing $500 billion in assets have taken a stand against apartheid, up from $40 billion in ’84. As a result of this pressure, more than 100 companies have stopped doing business in South Africa in recent years, he says.
But environmental cleanup, not apartheid, will likely emerge as the dominant ethical investing issue of the ‘90s. Nearly all of the socially responsible funds check for pollution abuses by the firms in which they invest. And just within the past year and a half, four new environmental funds have popped up, raising the total to five, according to Lipper Analytical Services.
Actually, these environmental portfolios don’t really fit the ethical mold. While they hope to appeal to ecologically minded investors, their primary intent is to capitalize on the excellent profit potential in this burgeoning industry.
Companies such as Waste Management and Browning-Ferris Industries--which, incidentally, don’t have spotless environmental records themselves--have posted uninterrupted annual profit increases dating back more than 10 years. And, if anything, demand for garbage handling, hazardous-waste disposal, water purification and related services will continue to grow in the years ahead, both here and abroad.
Just keep in mind that while the business potential remains bright, environmental stocks--and the mutual funds that own them--are prone to volatility. During the first nine months of 1990, the environmental portfolios dropped nearly 15% on average, compared to a loss of 13% for the average equity fund.
In terms of size, investment record and sales fees, Fidelity’s Select Environmental Services portfolio (2% load; 800-544-6666) so far rates as the best bet in this nascent group.
One of the most unusual ethical funds is the Catholic Investment Trust (3.75% load; 800-826-6677), managed by Alpine Capital Management, a Denver company that’s unaffiliated with the church. The fund buys and sells bonds issued by Catholic institutions, such as the dioceses of Denver and Phoenix. It also invests in the debt securities of non-Church entities that promote various social goals. For example, the fund owns bonds issued by public agencies in Nebraska and Alaska that are used to finance subsidized housing.
Other ethical standards endorsed by the fund include alleviation of poverty, respect for good labor practices, a commendable record on the environment and a few twists that are unique to the church. “We wouldn’t invest in the bonds of a drug company that’s developing a birth-control pill,” says John I. Dickerson, chairman of Alpine Capital.
The Catholic Investment Trust is too small ($4 million in assets) and new (it debuted in January) to have a meaningful track record. But it offers an alternative for religiously inclined bond investors. “And you don’t have to be Catholic to buy,” Dickerson adds.
DOES IT PAY TO DO GOOD?
One argument against “ethical” or “socially responsible” mutual funds is that they are underachievers. Because the funds avoid stocks or bonds issued by companies that, in their eyes, follow repugnant business practices, the funds have fewer available investment opportunities. And that, the reasoning goes, hurts performance. In reality, some do better than average. The following chart shows how selected ethical funds have fared.
TOTAL RETURNS Sales Fund/Phone 5-year 3-Year 1-Year Fee Calvert-Ariel Appreciation -- -- -14% 4.5% (800) 368-2748 Calvert Social Investment Managed Growth +74% +11% -3% 4.5%* (800) 368-2748 Calvert Social Inv. Bond -- +32% +6% 4.5%* (800) 368-2748 Calvert Social Inv. Equity -- +9% -10% 4.5%* (800) 368-2748 Dreyfus Third Century +59% +7% -7% None (800) 645-6561 Parnassus +27% -28% -31% 3.5% (800) 999-3505 Pax World +77% +21% +6% None (800) 767-1729 Pioneer +68% -4% -15% 8.5% (800) 225-6292 Pioneer II +60% -8% -17% 8.5% (800) 225-6292 Pioneer III +47% -4% -19% 8.5% (800) 225-6292 Equity Funds Average +69% -2% -13% Bond Funds Average +45% +24% +3%
Total returns are for periods ending Sept. 30, 1990.
Source: Lipper Analytical Services
