So you can't stand seeing your hard-earned money flow into the coffers of big oil. And you're especially turned off by the thought of prof-iting from its misdeeds. But when it comes to investing, can you really afford to put your money where your mouth is? Can you afford to invest with a clear conscience? Matching your investments to your personal values is certainly a thorny matter. Your ability to pay for a child's college education or to retire comfortably may hinge on the choices you make.
Socially responsible mutual funds have been around for several decades as a vehicle for ethical investing, but their returns haven't always matched those of the stock market as a whole. Nevertheless, the popularity of "values driven" investing has surged in recent years, from a lone fund called Pax World in 1971 to at least 60 funds today -- including some that have consistently posted healthy returns, helping the field to shed its weak reputation.
The Social Investment Forum, an association of professional investors and financial institutions, defines the category broadly to include the fi-nancial arms of churches and other religious organizations; funds that do minimal screening and exclude just one type of business (tobacco, for example); and conventional funds that have few or no limits on the type of stock they own but wield their power as shareholders to promote a particular social agenda. The forum estimates that 9 percent of all investments are now made with social values in mind. It counts 151 socially responsible mutual funds with assets of more than $148 billion, up from $111 billion in 2001. Morningstar, the go-to source for ratings and research on conventional mutual funds, is choosier, counting 60 funds with $28 billion under management -- a smaller number, but double what it was a decade ago.
The concept of socially responsible investing (SRI) first gained footing on Wall Street in the 1970s, when many Americans were being forced into personal investing by the erosion of the pension system. Some investors didn't want to own stock in a company whose policies they objected to, while others didn't want their money going to support the war in Vietnam, for example. Today half of all American households own stock -- 90 percent through mutual funds.
To some, knowing that the money earned on their investments hasn't been gained at the expense of the environment, worker safety, or public health is worth a tradeoff in overall returns. Others believe that investing in companies that look beyond quarterly earnings to consider the impact their businesses have on the community, employees, and the environment will actually produce better returns. After all, compa-nies that drill for oil in the pristine wilderness or market cigarettes to teenagers turn a profit by pushing the true environmental and health costs of their products on to the general public. Eventually the public catches on and demands repayment, in the form of either lawsuits or government regulation, and when that happens, the company's stock falls. Or so the theory goes.
No one really knows whether this theory holds up in the real world. On the one hand, asbestos manufacturers were driven out of business by lawsuits. But then there's the case of cigarette makers: Suits brought by state governments led to enormous civil penalties and unprece-dented regulation, which would at first glance seem to back up the do-gooder theory. After the industry agreed to pay $368 billion, in 1998, the stock price of Altria (formerly Philip Morris) fell by half. Since then, however, despite more regulations and more lawsuits, the stock has gone up fivefold. Further counterevidence is the strong performance of the aptly named Vice Fund. Banking on human weak-ness and the perpetual demand for all the things your mother warned you about, the Vice Fund has consistently outperformed other mutual funds by investing heavily in tobacco, alcohol, gambling, and weapons.
Theory aside, the socially responsible investing phenomenon has grown large enough to offer investors nearly all of the options present within the larger universe of mutual funds, from actively managed funds run by professional investors whose stock picking focuses on, for instance, small companies with fast growth and high risk, to funds heavily weighted in international stocks, to funds that have no manager and invest in an established set of companies -- an index -- often across a single sector of the economy, such as telecommunications.