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My Money Is Greener Than Your Money
Page 2

Indexing is like investing on autopilot: There's no stock picker to pay and no research fees to cover, so the portion of your investment that goes to operating costs is minimal. The Financial Times and London Stock Exchange (FTSE, pronounced "footsy"), to cite one example, maintains the FTSE4Good index, a list of socially responsible companies screened by a complex set of criteria ranging from environmental sustainability to labor standards within a company's supply chain. The mutual fund giant Vanguard, for instance, buys stock in companies in the index and saves investors about 1 percent a year in management costs; that doesn't sound like much, but it can add up. Similarly, the PowerShares WilderHill Clean Energy Fund is an exchange-traded fund, which means it operates as a mutual fund does -- by pooling and investing many people's money -- but individual investors can buy and sell shares as often as they like, as if the fund were a stock. It invests primarily in smaller companies that are developing products to generate energy from the sun, wind, waves, tides, hydrogen, or fuel cells.

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Among the actively managed SRI funds, there's a good deal of variation in how aggressively a manager seeks out exceptionally conscien-tious companies. Some stock pickers simply screen out the biggest corporate sinners, while others search for companies that, say, use recy-cled materials in their manufacturing processes. And whereas some funds do their own digging, others pay research firms such as Innovest, which specializes in analyzing performance on environmental, social, and governance issues.

If you want a fund with stringent standards, you should probably go to a firm that sells only socially responsible funds, says William Rocco, a Morningstar analyst who covers the SRI industry and invests in it himself. Conventional investment companies offer a variety of mutual fund products, some of which are socially responsible, but their screens tend to be more relaxed. Because the most consistent per-formers are generally broad-based funds that include companies across every sector of the economy, some SRI funds will look to improve their returns by buying stock in the "best in class" company in sectors that would otherwise be screened out. Such diversified funds make for a less risky investment, but the tradeoff is the chance that an oil company -- albeit a better-behaved one such as BP -- will slip into a fund that waves the socially responsible flag. So if there are particular industries or companies you find intolerable, it's up to you to check a fund's list of holdings on its website or through the Securities and Exchange Commission's website.

Still, for many investors, the big question is performance. Traditionally, a mutual fund is compared only with other funds that make similar types of investments. For example, funds that focus on small, high-growth companies would not be compared with those that focus on the large, "slow and steady" companies that form the backbone of the economy. Funds that invest in a blend of stocks and bonds are compared with funds that do likewise. The socially responsible movement is a mixed bag of fund types, so it's tough to gauge the success of the phenomenon as a whole.

Morningstar has taken a stab at it, and by its account, SRI funds returned 7.6 percent for 2006 as of mid-October, falling short of the 9.7 percent gain in the broader stock market, as measured by the S&P 500. Not bad, but many conventional funds are doing better. Lately oil stocks have surged and funds that exclude them have lagged. As a result, over the past three years SRI funds had an average return of 8.8 percent while the market posted 12.3 percent. But over the 10-year period that includes the dot-com boom, SRI funds are on pace. The tech-nology companies they favor thrived, which narrowed the performance gap: SRI funds averaged 7.8 percent a year versus 8.6 percent for the S&P 500.

Over the long haul, the odds are slim that any one manager, or any one sector of the economy, will beat the market. The challenge of the SRI fund is to succeed without investing in, say, oil, one of the most profitable sectors in recent years and a large segment of the economy. It's like racing a car with a part missing against one that's intact -- certainly not a race you're apt to win.

Nevertheless, those who turn to SRI funds in hopes of matching their values to their investments stand a good chance of doing well by their bank accounts, too, if they choose wisely and apply the same discipline smart investors use to pick conventional funds. Look for so-called no-load funds that have a low expense ratio (minimal management fees) and no sales charges, and compare long-term results, not just what happened last year. And while you're at it, cross your fingers for another Internet boom.


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OnEarth. Winter 2007
Copyright 2007 by the Natural Resources Defense Council