Moral funds might hide hypocrisy

Value Judgments

Your Money

August 22, 2004|By JANET KIDD STEWART

JUST WHEN the socially responsible investing movement was gaining some respect for better performance, along comes an insurgent: the socially irresponsible mutual fund.

The Dallas-based Vice Fund posted a 1-year return of 33.82 percent for the year ending June 30, predominantly by investing in gambling, alcohol, tobacco and defense.

Manager Dan Ahrens considers these industries recession-proof despite their political incorrectness. In fact, the so-called sin stocks have performed well in downturns on the theory that consumers will drown their financial woes in vice.

Ahrens also relishes the fact that the return beat the great majority of funds whose charter includes a social mission.

He calls it "outrageous hypocrisy" for money managers to author a vague mission statement in a prospectus and then decide right and wrong for shareholders by buying certain companies and excluding others.

He says some investors buy the so-called SRI funds without realizing how decisions get made. Some environmentally screened funds, for example, don't exclude polluters but instead look for the ones with the least offensive track records.

The largest holding for the Neuberger Berman Socially Responsive fund is a Houston crude oil and gas exploration company. One of the top holdings in the Ariel Fund, one of the largest SRI funds, is a casino operator.

This type of mission is typically spelled out in the fund prospectus, but Ahrens argues that such detail often is lost on investors until it's too late - after the purchase.

And what about good corporate citizens in the industries often screened out by the do-gooder funds, Ahrens asks? Suppose a beer company had a fantastic environmental record, or a weapons maker employed more women in senior positions than the average for the Fortune 500?

Welcome to the messy business of using anything other than a dollar sign to guide your investing decisions.

"Historically, there has been a disconnect between money and values," said Steven Schueth, a former director of the Social Investment Forum and president of First Affirmative Financial Network, an investment advisory firm in Colorado Springs.

Today, the SRI market has more than $2 trillion, according to the forum. Even our money is multi-tasking.

"More people are saying, `I want to be consistent about who I am in all aspects of my life," Schueth said.

Not all financial experts are believers.

Veteran Chicago-area money manager Donald Yacktman doesn't buy tobacco stocks personally but has been a big buyer of them over the years in his mutual fund, of which he owns shares. The Yacktman fund has no social screens.

"I'm walking both sides of a line, I understand," he said. It's simply misguided to steer a public mutual fund using a social or ethical litmus test as the focal point, he said.

The problem is that any social (or anti-social) test that diverts a stock selection limits your diversification.

SRI funds did very well in the Internet bubble era (and horribly in the burst) because many of them were light on heavy manufacturing.

"When those funds were outperforming, it was an anomaly on the positive side," Schueth said. Just as sin stocks are outperforming now, he said.

Plenty of academic studies claim the social funds perform just as well as nonscreened funds, but because of such anomalies, I'm still skeptical.

I asked Morningstar for a list of SRI funds, with their three-year returns and percentile rank within their investment category. Rank is crucial because if I'm not making results the top priority, I'm simply in the game of handing out money. That's charity, not investing.

Of the 79 funds Morningstar tracked with a three-year record, just eight performed in the top 10 percent of their investment category as of the end of July. Only 19 scored in the top quartile.

Among the best in performance: The Women's Equity Fund (FEMMX), Ave Maria Catholic Values fund (AVEMX), Neuberger Berman Socially Responsive (NBSRX) and Calvert Social Investment Equity (CSIEX).

Yes, you can do well by doing good. But if your values don't line up with the top SRI performers, consider top-earning, low-cost index funds instead and donate some of their proceeds to your cause.

And learn to live with a little ambiguity.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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