Socially responsible stock fund for PP?

[MediumTex]

Why are you thinking about a socially responsible fund?

I think that if you look closely virtually no corporation is truly socially responsible.  Thus, the socially responsible tag is, IMHO, often misleading.

Does socially responsible mean no defense contractors, tobacco companies, oil and gas producers, fast food companies or financial services companies?  Arguably, these companies are all engaged in deeply socially irresponsible behavior--they kill other people, kill their own customers, destroy the earth's atmosphere, poison people, and steal the public's money.

[AdamA]

Tell her the "S" in VTSMX stands for socially responsible. 

[KevinW]

IMO: a SRI stock fund is acceptable but a total stock market fund is better.

The screening rules tend to tilt SRI funds away from the total market.  They tend to be large cap growth (vs. blend) and underweight energy, overweight IT, etc.  So there will be tracking error vs. the total market.  Browne suggested the total market (TSM) and there are a few advocates for value tilting in the PP, but I haven't heard anyone make a case for growth.

For an illustration, look at a chart of VFTSX compared to TSM or their Large Cap Growth index over the last 10 years.  Not pretty.

At one point I was very interested in SRI but became disenchanted after researching it.  Firstly the screening rules never aligned with my own personal definition of "responsible." E.g. I'm uncomfortable with patent abuse and consumer debt and A-OK with alcohol yet these funds always hold lots of Apple, Microsoft, and Bank of America and reject InBev.  The rules seem to reflect a witches' brew of Democratic Party and Christian values and, just like planks of a political party, will never perfectly reflect any individual's views.  Second, SRI funds' performance and fees have been significantly worse than TSM and growth index funds over their lifetime.  My skeptical side wonders if this is yet another ploy to cash in on peoples' good intentions.  My pragmatic side thinks you do more good by investing in a policy-neutral way and then donating the extra proceeds to targeted charities.

All that said, SRI funds are mostly large cap stocks, which ought to rally during prosperity.  So fundamentally they should work as the stock allocation of the PP.  Possibly not as well as more conventional alternatives, but still in the same ballpark.  If that's the one concession that has to be made to move forward on a PP, IMO that's an acceptable compromise.

[stone]

These would only make sense IMO if they actively choose say one oil company and not another because one of them didn't shoot as many people in the Niger Delta or whatever. Or chose one tobacco company over another because one didn't market as aggressively to children were there were no legal obstacles to doing that. If there was actual setting competitors off against each other and loud proclamations about what they were doing then it might have some point and get my interest. Simply taking a sector view seems pointless and lazy to me.

[Tortoise]

I get the sense that social responsibility/ethical behavior tends to be inversely correlated with company size. Not all large corporations are unethical, to be sure, nor are all small companies ethical, but the tendency seems to be there. Extremely large, powerful corporations often have the financial means and lobbying power to act unethically and actually get away with it--or even be rewarded for it. Small companies, by contrast, seem less insulated from market forces and must therefore find ways of earning profits by creating actual value for people instead of the mere illusion of it through rent-seeking activities, intellectual property monopolies, etc.

Along those lines, how's this for an idea: Could investing in a diversified index of very small companies be a form of "socially responsible" investing? If so, how small would those companies need to be? One could argue that they'd need to be so small that they're typically not listed on stock exchanges--which would make it difficult to invest in a broad index of them.

A simpler compromise might be just to eliminate the more blatantly unethical corporate giants from one's stock portfolio by investing in a standard small-cap index. You might call it "socially semi-responsible" investing.

[craigr]

There are plenty of small companies that do work for the DoD. So no escaping that. Also the term "socially responsible" is very slippery. It means different things to different people.

I think the best advice is to invest agnostically and use the profits to donate to a charity that reflects your core values.

Or you can just say heck with it and invest in VICEX mutual fund. The fees are atrocious, but you'll be concentrating your bets in defense, alcohol and gambling to name a few:

http://www.usamutuals.com/vicefund/phil.aspx

As a Variable Portfolio investment only though!! 

[cabronjames]

To the OP, I would check the top holdings of the SR fund, & see if they are actually socially responsible.  Also, why keep an old job 401k?  Roll it over to a custodian like Vanguard, where you have more fund choices, & lower expense ratios.

--

A person asked me for advice on the list of crap mutual funds in his work 401K, & noted he preferred "Socially Responsible Investing".  I looked at the the Top 10 holdings on that list.  iirc non seemed "socially responsible" (I'll reference here as "SR", & were dominated by 2 industries:

1 Too Big to Fail Bank$ters like JP Morgan.  If it's not obvious how anti-SR they are, google Matt Taibbi

2 information technology, incluing Oracle, Intel, & Microsoft.  These companies often have cartel/mono/oligopoly positions in the product segments that account for the bulk of their profits, to the point of limiting competition for their own benefit to the detriment of both innovative entrepreneurs & the general public/economy.  These companies are notorious abusers of the H1-B/L1 visa programs, & age discrimination.  The same countries hypocritically bash US "STEM" (science technology engineer math) workers, as "not skilled enough" despite their BS to PhD education, to actually have gainful employment until ~65/retirement age (whereas this is a birthright given for many other fields such as quasi-gov workers like physicians, gov workers like librarians, etc), because of these same employers' anti-STEM employee policies.  Etc (on other anti-SR info tech industry behavior)

I get the sense that SR is a marketing gimmick, which confuses a special case of "socially responsible", specifically not being a polluting heavy industry like oil, warmongering industry like military contractors, nor "vice" industries like alcohol or casinos, for being socially responsible in general.  It is necessary but not sufficient.  Microsoft & JP Morgan are not socially responsible just because they aren't heavy poluters, make missiles or beer.

What is worse iirc, is that the SR fund was doubly worse than the S&P500 index from Vanguard: higher expense ratio, worse div-reinvested CAGR return.

I convinced my friend to use the S&P500 index from his 401k list, & that if he felt "guilty", he could contribute more to the charity of his choice.

[MachineGhost]

A true "socially responsible" fund is not a marketing or screening gimmick, but reflects an activist investor approach towards making operational changes that are more "socially responsible".  An excellent example: http://www.domini.com/

MG

[swmurray]

To the OP...

My wife and I rolled her ex-employer 401(k) into Domini in the late 90's to 'invest responsibly". That was a good lesson on how not to invest.  Besides getting bombed by being overweight in IT, we learned that responsible investing means something different to everyone and the management fees were much higher too!

Suggest that you carefully look at the details of the funds "SR" criteria, turnover, and portfolio before proceeding.

We have come to the conclusion that we are better off with a conventional index fund and then donate/invest our 1% management fee into local organizations of our choosing.  We have also chosen to invest in some specific companies with which we are more familiar and meet our personal "SR", and environmental responsibility criteria.

Good luck,
Steve

[stone]

Is there some sense in the idea that we have much more power as consumers than as stock owners? If as a stock buyer I choose not to buy a certain company, then that simply means that someone else gets to buy that stock at a better price than they otherwise would. The only way an influence would come about would be in terms of the cost of leverage for the company or in terms of the company being subject to take-overs that would change the management. Perhaps employee stock options might be effected and that might have some influence but it all seems very indirect and slippery.

By contrast as a consumer, every cent I do or don't spend hits the company directly. Am I missing something?

[melveyr]

Is there some sense in the idea that we have much more power as consumers than as stock owners? If as a stock buyer I choose not to buy a certain company, then that simply means that someone else gets to buy that stock at a better price than they otherwise would. The only way an influence would come about would be in terms of the cost of leverage for the company or in terms of the company being subject to take-overs that would change the management. Perhaps employee stock options might be effected and that might have some influence but it all seems very indirect and slippery.

By contrast as a consumer, every cent I do or don't spend hits the company directly. Am I missing something?

Gumby,

I think your analysis makes great sense assuming an efficient stock market. However, some people propose that "sin stocks" are chronically under-priced. If this is true, then the moral judgements of investors have historically affected the capital raising capacity of corporations because their public offerings and bond issues receive a lighter demand.

I don't know if this is true or not, but it would be a counter-argument.