Choosing a socially responsible company

Getting Started

Your Money

July 04, 2004|By CAROLYN BIGDA

THOUGH emotions shouldn't influence the timing of investment decisions - which usually leads to buying high and selling low - we don't have to be indifferent about the way our investments are being used.

And people who practice what's called socially responsible investing are anything but indifferent. They invest in companies that share their social and environmental interests.

The most popular socially responsible portfolios these days are ones that screen stocks based on environmental, tobacco and labor issues.

One in nine professionally managed portfolios in the United States (totaling $2.14 trillion spread around mutual funds, pensions and brokerage accounts) has a social bent, according to the Social Investment Forum, a nonprofit industry group.

Calvert Group, which offers an array of socially responsible mutual funds, thinks that accounting scandals at companies such as Enron Corp. may lead to more interest in such investments.

A survey conducted in November by Harris Interactive for Calvert Group found that 73 percent of investors polled believed socially responsible funds were more likely than other funds to invest in companies with ethical business practices.

But Bill Rocco, a senior analyst with fund-tracker Morningstar Inc., points out, "Just because it's a nice place to work, with an environmentally safe product, doesn't mean there won't be a bad business manager."

Screening companies for social responsibility is an art, not a science. It takes dedicated research to learn that an automobile manufacturer is lobbying against tighter emission controls while paying lip service to environmental principles.

The Social Investment Forum's Web site (www.socialinvest.org) lets you run a preliminary search of mutual funds based on categories, such as the environment, tobacco and labor. Once you've selected a few, you should read the mutual fund's prospectus, which outlines the fund's social definitions, as well as annual returns and management objectives.

Analysts used to believe that socially responsible funds generally underperform their peers, but recent studies have argued that returns are equivalent.

TIAA-CREF Social Choice Equity (TCSCX), for instance, has beat 90 percent of its large-blend category so far this year, and was in the top quarter for one-year and three-year annualized returns.

As for fees, you can expect to pay about 0.05 percent more, said Steven Schueth, president of First Affirmative Financial Network, an advisory firm for social investors.

However, you can buy social market-index funds that, like all index funds, have lower expenses. The Vanguard Calvert Social Index (VCSIX) has a 0.25 percent expense ratio, comparable with Vanguard's Growth Index (VIGRX) of 0.23 percent.

But diversification may be a more difficult hurdle to clear.

Morningstar research shows most companies that clear socially responsible screens are from growth industries, such as health care, technology and media. Value assets, including energy companies and utilities, have greater difficulty passing environmental thresholds.

Also, it is easier to track a large corporation's social policy than a tech start-up's, so the number of small-cap funds is limited. And forget about funds that deal in more sophisticated instruments, such as hedge funds and commodities, Schueth said.

E-mail Carolyn Bigda at yourmoney@tribune.com.

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