Profiting From Social Investing
Dr. Patricia Kenschaft invests her money only in companies deemed socially responsible by the Domini 400 Social Index, which is the S&P 500 Index of the politically correct crowd.
"I get an important sense of personal satisfaction and empowerment," says Dr. Kenschaft, a 58-year-old professor of mathematics at Montclaire State University, Montclaire, N.J. "I want to be a responsible American."
Socially Responsible Investing - SRI for those in the know - is the feel-good movie of the investment world. Individual investors, like Dr. Kenschaft, put their money in socially responsible companies via direct stock sales and mutual funds.
They don't regret the price of admission, they tend to feel emotional and civic inspiration and find affirmation about the potential for a capitalistic democracy that is livable for all citizens, as well as it is profitable.
According to the Social Investment Forum (SIF), the Washington, D.C.-based, not-for-profit association of this blossoming stock market niche, investors like Dr. Kenschaft today account for $1.2 trillion invested in mutual funds and direct stocks. That is almost one out of every 10 investment dollars professionally managed.
The SIF has 50,000 individual investor members, and 2,000 business members. "The idea is to mix personal beliefs with investing," says Elisa Gravitz, vice president of SIF, and executive director of Co-op America, another consumer and investor organization.
Sounds fairly lofty. "Yes, and some people think they can't have an effect on building a better world," she says. "But remember, when you invest, you pick companies that are creating tomorrow's products, services, and ideas."
To investors with strong beliefs in human rights, the environment, employee diversity, and corporate citizenship, socially responsible investing sounds great right off the bat, especially since the Domini Index is fairly competitive with the S&P 500 Index.
A quick comparison shows that the Domini Index return was 36.02 percent in 1997 vs. the S&P, which was 33.36 percent. A three-year analysis has Domini at 30.33 percent vs. S&P at 29.82 percent. A 5-year outlook, however, leaves Domini behind, with a score of 22.55 percent, versus S&P's 22.82 percent.
When it comes to an overall performance comparison since Domini's inception in 1990, the incumbent S&P is faring a little better, with a 19.97 percent return vs. Domini's 19.14 percent.
Defining what constitutes a socially responsible company is tricky business, however. The Domini Index excludes tobacco companies, nuclear weapon companies, and environmentally hazardous companies. Ultimately, SRI means different things to different people.
While the Domini 400, produced by Kinder, Lydenberg, and Domini fund managers in Boston, Mass., is the only published index for SRI available today, the liberal agenda is not the only definition of what is socially responsible.
The Timothy Plan mutua fund, for instance, adheres to a Christian, right-wing agenda, excluding companies that having anything to do with abortion rights, birth control pills, pornography, and such. "It's all subjective, gray matter," says Lisa Leff, director and portfolio manager of the social investment awareness program at Smith Barney.
Some top companies that Leff says are popular among her investors include:
The concept of socially responsible investing does beg some important questions. The first one is market performance: Can you make as much money being conscientious as you can otherwise?
"I insisted on socially responsible investing, and my husband wanted bigger bucks," says Dr. Kenschaft. "But now he has watched how well my investments have performed and has switched some of his own money over."
Dr. Kenschaft isn't specific about her return on investment, but she does say that one of her investments is Pax World, which is a balance fund that includes bonds.
Analysts and fund managers - including Peter Kinder, a principal of the KLD, the creators of the Domini Index - say screening processes used for socially responsible indexes are subjective. Can such an index then be truly representative, or even fair?
What if a company has exemplary hiring practices but has an offshore manufacturing plant that's a sweat shop? Are any corporate conglomerates pure as the driven snow when it comes to all categories?
"Standards are applied to each criteria, and if a company falls below, we drop it off the index," says Kinder. KLD makes adjustments to the Domini Index once a month, and all additions and deletion information is available at its Web site.
"For example, we dropped Nike at beginning of the year, because despite positives in workplace issues, its performance in the Third World was sub-par," says Kinder. "We dropped Gannett 18 months ago because of its labor strike. That was a tough call because with the exception of maybe Nordstrom's, Gannett has the best policies for women's issues. You have to make a judgment call.
"Making judgment calls" is precisely what Donald Yacktman, president of Yacktman Asset Management, finds appalling. "When you attempt to have mass agreement on what is responsible - which is what the Domini Index attempts - it's impossible," says Yacktman. "At some point the index screening becomes arbitrary and irresponsible."
Kinder says that KLD's methodology is neither arbitrary, nor McCarthyistic. "The Domini Index is representation of broad se of screens, but we never say that if you don't invest in Domini stocks you're not investing responsibly," he says.
Written By Rivka Tadjer