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– Thomas Sowell
Debunking the myth of lower SRI performance
by Todd Walker
In my role as a financial advisor specializing in socially responsible investing (SRI) I am often asked whether social investments – those screened for such activities as gambling, alcohol, nuclear power, pollution and poor employee conditions – perform as well as conventional ones. In fact, what surprises me is how pervasive the opinion is that SRI investments may be good for society, but not for your wealth.
Foundations of the Myth
First, to be fair, there are grounds for the opinion that social investments underperform – but from years ago. In the early years of SRI -- the 1980's and 90's -- far fewer companies qualified as socially responsible. This dramatically reduced the universe of stocks and bonds available to SRI managers and mutual funds, often resulting in lackluster performance
However, improved corporate behavior across many spectrums – plus the launch of many pro-active green companies such as alternative energy, natural foods and natural products – vastly increased the investment universe available to socially responsible investors and mutual funds. For example, today such companies as Google, Dell, General Mills, Apple and Amazon would commonly be accepted as "social" by many leading SRI managers and mutual funds.
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Moving on to Parity – and Then Some
Not surprisingly, as the overall universe of investment candidates has improved for to SRI managers, so has their performance
According to the Social Investment Forum (SIF) (www.socialinvest.org) a growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over the long term. Several of these peer-reviewed and published studies have been awarded the prestigious Moskowitz Prize. Additionally, more than 20 studies demonstrating that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.sristudies.org — a compendium of all the major academic studies on SRI.
Most recently, in 2009 the Social Investment Forum reviewed the performance of 160 socially responsible mutual funds from 22 of its members, and found that 65% outperformed their non-social benchmarks in 2009. The SRI funds reviewed by SIF outperformed their benchmarks across nearly all asset classes. The performance data was provided by Thomson Reuters, an independent third party.
Another indication of the competitive performance of socially responsible investments is the performance of SRI indexes. These indexes are designed to be compared to non-SRI indexes, such as the S&P 500. The longest-running SRI index, the FTSE KLD 400, was started in 1990. Since that time, it has continued to perform competitively. The FTSE KLD 400 averaged 9.22 percent from inception (1990) through May 31, 2010, compared with 8.39 percent for the S&P 500 over the same period. (Source: www.kld.com .)
If there was any air left in the old arguments against socially responsible investing (SRI) — primarily, that a restricted investment universe inevitably leads to lower return on investments — those arguments should be fully deflated by now
Why Socially Responsible Investments May Outperform
What could be some reasons for social investment outperformance to date? Many believe the answer lays in common sense. Companies that are wise enough to realize that providing healthy workplaces … or avoiding risky products or practices that generate lawsuits or bad press … or supporting local communities … probably are companies that are simply smarter overall. A good recent example of this theory is the behavior of various social banks such as Shore Bank, Wainwright Bank & Trust, Chittenden (People's United), New York Community Bank and most credit unions during the years leading up to the recent sub-prime crisis. These organizations obviously saw the increasingly liberal lending practices of their competitors during that time, but realizing that this kind of over lending actually could be harmful to their customers (and risky to their institutions), they bucked the trend and stuck to their tried and true conservative, reasonable leading requirements. The result was that they had no "sub-prime" exposure when the floor fell out of housing and they now have among the strongest balance sheets in the financial industry, helping them to increase their market shares in this environment. This is the kind of common sense that characterizes socially responsible companies, and helps them to outperform their competitors over the long haul.
What Matters to Performance More
Our goal is not to claim that social responsible investments do consistently better than non-social ones – but to simply dispel the myth that they do worse so that it does not stand in your way of investing socially. For most social investors, so long as they can own social investments that do as well as the broad averages, and which support their values, they are happy.
However, whether you decide to invest socially or not, we would not like to end this article without emphasizing a more important factor to your long-term performance than social versus non-social. And that's "asset allocation" -- the way you diversify your money across different types of investments. This is too large a subject to discuss in depth here (you can Google for many explanations of asset allocation), but let me stress that from my experience how you divide your money among various asset classes -- stocks, bonds, international investments, commodities and money market funds -- can have a much larger impact on your long-term performance than the individual investments you select – social or not.
Because, as most famous investors like Warren Buffet have found out over time, what matters most in investment performance is avoiding major losses. If you can avoid major declines with the bulk of your money you can actually come out ahead even if your yearly returns are rather average. Asset allocation – the science of diversifying your money -- helps reduce the risk of major loss. So whichever type of investment manager you use --- social or non-social (or you manage your investments on your own), make sure to focus on asset allocation first, along with your admirable goal of doing some good with your investments
Todd Walker is a Financial Advisor Representative offering securities through Financial West Group (FWG), Member FINRA/SIPC. He can be reached at 802-325-2200, firstname.lastname@example.org or www.PAMVermont.com. Progressive Asset Management is the socially responsible affiliate of FWG. Office of Supervisory Jurisdiction: 167 Exeter Road, Newfields, NH 03856. All rights reserved.
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