Social investing: Not all agendas are equal

Your Funds

April 03, 2005|By CHARLES JAFFE

MOST fund managers don't dump a favorite stock when the company makes a move to increase revenues and expand brand recognition.

So when the Pax World funds announced this week that the firm had reluctantly unloaded 375,000 shares in Starbucks - a longtime darling of investors - it shined a spotlight on investing with an agenda.

Social investing - and I do not call it "socially responsible investing" because that implies that all other firms are irresponsible - is the investment art of "doing well while doing good," choosing investments based first on a value system, then on profit potential.

Screening out bad actors tends to make social funds more costly than other issues and can dampen potential returns, although a number of social funds have stellar long-term records.

As the Starbucks situation highlights, however, being a "social investor" means different things to different fund companies.

There are about 200 social investment funds, and each manager has a unique approach. Some funds invest based on religious principles, and others follow their own value system. The most common screens, according to the Social Investment Forum, are for environmental and human rights issues, plus alcohol, tobacco and gaming.

On the surface, those issues don't seem to affect Starbucks. The Seattle-based coffee purveyor has a strong record on environmental issues, has promoted fair trade and much more. Couple those practices with phenomenal returns over the past few years and you have precisely the kind of stock most social funds would go for.

But when Starbucks announced plans for a distribution and development deal with Jim Beam Co., the whiskey manufacturer, it created discomfort.

When it comes to products, social funds typically take issue with manufacturers more than with retailers. That means shunning the cigarette manufacturer, but not necessarily the grocery chain that sells smokes. Only when a retailer gets a big percentage of its revenues - generally 20 percent or more - from selling the items the fund manager avoids will the stock be screened out of the fund.

Jim Beam plans to sell a coffee-based alcoholic beverage, capitalizing on the popularity of the Starbucks brand.

Pax World's prospectus says its funds will not invest in companies that "derive revenues from the manufacture of liquor."

"It's a bottle of alcohol with the Starbucks name on it," says Anita Green, vice president of social research for Pax World, "and Starbucks is deriving income from it. ... It's a great company, and there is a lot we like about it and didn't want to do this, but we're not interested in cutting corners on our policy."

Pax World's prospectus gives it six months to divest shares in a company that fails its screening criteria. The company, which had been holding Starbucks for eight years, took that time to make the sales and acknowledged the move after divestiture was complete.

Green acknowledged that the liquor screen "does not rank highly" with the firm's investors, who are more concerned with environmental and labor issues.

Moreover, the Starbucks-Jim Beam deal did not get the coffee company kicked out of many other social portfolios. The Domini and Calvert funds have not dumped Starbucks, and will wait to see how the Jim Beam deal works out before deciding whether a boundary has been crossed.

In the past, these kinds of issues have gone both ways. Domini did not kick out Campbell Soup when that company's Godiva chocolate subsidiary introduced a brand with liqueur in it, but it dropped Hasbro in 1999 after the game company licensed the board game Monopoly for use on casino machines.

"These are close, hairline calls," says Amy Domini of the Domini funds. "A survey of our investors shows that people don't care as much about alcohol issues, but that doesn't mean you bend the principles of the fund. It means you watch what is happening. It may be that as time goes on, we feel the same way Pax does on this."

For investors, the issue highlights the need to match agendas with social funds. (Some such funds do not buy government bonds because Uncle Sam funds the "war machine," and others buy Treasuries because Uncle Sam funds the arts, AIDS research and more.) Examine not only the screens a fund uses - a list of funds and what they screen for is at - but how those rules are applied, so that you can decide how strictly your values will be applied to the portfolio.

If the Pax decision makes you say, "I would have let my profits run," it may also be saying that social investing is not the right choice for you.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.

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