I’ve always been fairly cold-blooded about “socially responsible investing” — the notion of shunning investments in companies that have subsidiaries in South Africa (back before the fall of Apartheid) or that make cigarettes or that make bombs.
I feel I’m as anti-Apartheid, anti-tobacco, and anti-bomb as most, but that limiting my investment choices will ordinarily do no good at all (except maybe to make me feel good), while reducing the returns I can earn and then contribute to fight Apartheid, tobacco or bombs.
I would never buy a new issue of stock or bonds from a tobacco company, because that might in some small way help raise the money needed to build a new cigarette factory. But the tobacco companies (to continue with this example) are awash in cash, so my buying their securities in the secondary market will in no practical way help them — while the considerable profit I once made speculating on R.J. Reynolds zero-coupon bonds, bought at a huge discount long after they had been issued, was a dandy source of funds to finance anti-tobacco activities.
What’s more, if you do buy shares in a company doing something you find objectionable, you can vote against management if and when a shareholder resolution is presented to stop it. Not that they ever win, but sometimes management does notice.
So you can see I have been something of a skeptic when it comes to clearly well-intentioned but, in my view, merely “feel good” mutual funds that promise to shun the bad guys. Collectively, they have so little clout as to be infinitesimal.
Now comes Sophia Collier, who, readers of the last couple of days will recall, has already proved me wrong on the issue of money-market funds. I assumed her E*Fund’s unusually high total return — #1 among 287 — had to be the product of taking more risk, but no.
Would she also prove me wrong for ruling out “socially-responsible” mutual funds?
Here the answer is a little less clear. But at the least, my respect this type of fund, and her success in particular, has risen substantially.
Let’s start with the E*Fund, the quasi-checking account money-market fund. Sophia tells me she won’t invest in Treasury securities because she can’t be sure what they’re being used to finance. Her money could go for bombs! Well, that strikes me as pretty silly — except that she winds up getting an even slightly better return for her fund by investing, instead, in government guaranteed Small Business Administration securities. She likes them because they help to finance small community businesses. “Money funds have been criticized for taking money out of local communities,” she says. “Investments such as the SBA guaranteed small business notes we hold in the E*Fund are one way to address this concern.” So why not? If you can get a good return at the same time as you cast your vote, as it were, for the things you believe in — why not?
Twenty-three thousand investors in the seven Portsmouth, New Hampshire-based Citizens Trust funds apparently already like this idea, so who knows — it could catch on and develop at least a little clout along the way.
The six funds besides E*Fund (paraphrasing loosely from their own web site):
The Citizens Emerging Growth Portfolio was the No. 1 overall performing “mid-cap” mutual fund for the year ending August 29, 1996, among 134 mutual funds analyzed by Lipper Analytical Services, Inc., with a one year total return of 30.64%. It’s an aggressive fund that concentrates its $50 million or so in small-and mid-sized U.S. companies.
Citizens Index Portfolio has $153 million in assets and seeks capital appreciation through investment in a market-weighted index of 300 of the country’s top socially responsible companies. What’s interesting is that, at least these days, the socially responsible companies often seem to be the most forward-thinking — e.g., the high-tech companies — and they are among the ones doing best, both in real terms and in the stock market. So at least for now, screening on the basis of social responsibility may not be a handicap at all. It could be a plus.
The “plus” could in some small measure be because good social policy improves morale or attracts more of the best people. (For example, IBM recently extended spousal benefits to same-sex couples. That could encourage a brilliant gay man or lesbian to join or stay with IBM. It would be less likely to cause someone outstanding to quit or fail to apply. So in that sense, IBM improves its position in the competition for talent.) Good social policy could also suggest a wider vision and a greater motivation. Or fewer regulatory actions and liability suits down the road.
Then again, if your competition is packing more chickens into the coop, to their discomfort but your lower costs; or using live bunny rabbits to test something quickly that you test in a more humane, roundabout way; or you subcontract to Chinese prison labor in order to get your costs down — in these and countless other ways, the less “socially responsible” company might be able to bring goods to market faster or cheaper than the competition, and thereby reward its shareholders with higher profits.
So it’s not at all clear that past success achieved by social screening equals future success. But it’s possible. And worst case, with a universe of choices this broad, it’s unlikely you’d be sacrificing much.
So I’ve gone from being a respectful scoffer to being — well, just respectful.
The Citizens Income Portfolio is a bond fund focused on current income. It seeks issuers “whose financial strength is improving, so the fund has the potential to gain higher than average return without taking on too much rate or credit risk.”
Citizens Global Equity Portfolio, still tiny with only about $20 million, seeks gains throughout the world (including the U.S.).
Working Assets Money Market Portfolio makes no sense for most individuals, since it lacks the extra juice of the E*Fund. I suppose if you had $100,000 in one of the other funds and wanted to switch temporarily to cash (but exceeded E*Fund’s $15,000 maximum), this would be a convenient place to do it.
Recognizing that most crazy liberals live in California — OK, let’s call a spade a spade: San Francisco — there’s the Muir California Tax-Free Income Portfolio. Can a fund for Greenwich Village and the upper West side of Manhattan be far behind? These funds (and here of course I am decidedly not paraphrasing from the press release) are for socially responsible investors who want to avoid paying taxes, leaving that socially necessary act to others.
And there are other potential ironies. Is a company that produces life-saving drugs, but sells them much cheaper abroad than in the U.S., gouging it’s richer U.S. customers, or practicing a sort of Marxian strategy of “from each [nation] according to its ability [to pay] to each according to its need?” Or what of George Washington’s dictum that “to be prepared for war is one of the most effectual means of preserving peace?” If true, might our top military defense contractors not be the best anti-war bet of all?
In short, finding the moral high ground ain’t always simple. But does that mean there’s no such thing as a good corporate citizen? Or that Sophia is wrong in trying to invest in them?
About 750 of the nearly 2,000 companies Citizens Trust has screened have made it to the “approved” list of investments. “In choosing its investments [reads the press materials], Citizens Trust portfolio managers seek successful companies that are contributing to a better, safer world and creating value for their customers, shareholders and the community. They do this through a series of screens that include environmental concerns, workplace policies and community involvement. In addition, Citizens Trust shuns investments in companies that derive significant revenue from nuclear power, weapons, tobacco or alcohol products or that use animals to test personal care products or otherwise treat animals in a cruel manner.”
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Wealth is not his that has it, but his that enjoys it.~Benjamin Franklin
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