Do you care about workplace conditions or the environment? Consider putting your money where your values are.
Al Gore. That's the man Jim Larson thanks for the growing interest in socially responsible investing.
Gore's movie, "An Inconvenient Truth,'' has created "a bunch of interest in green -- especially in young people," Larson said. He and his wife, Jill Longo, are registered investment advisers in St. Louis Park who specialize in socially responsible investing.
Morningstar says there are 130 such funds, with $48.8 billion in assets, compared with 39 funds and $5.4 billion in assets a decade ago. Some fund families, such as Pax World, Calvert, and Domini Social Investments, have been around for decades.
The Social Investment Forum considers more than 200 funds to be of a socially responsible nature, which it defines as routinely running one or more social or environmental screens.
The term "socially responsible investing'' means different things to different people. At its core is the concept that investors need not leave their values or ethics behind when stepping onto Wall Street. Instead, individuals can decide what matters most to them and screen out companies that don't match their values.
Tony Layne of Minneapolis switched six months ago to investing in companies that don't violate his values. Layne, 30, is an architect with a firm focusing on sustainable design. In his job, he's constantly required to prove whether the "sustainable choice is the better economic choice," he said. That same idea can work in personal finance matters, he figures.
Fortunately for him, his company is one of the rare ones offering socially responsible funds in its 401(k) plan.
Making the choice
When adviser Larson meets with someone new to socially responsible investing, he skips all the labels and simply asks, "What are you interested in?"
There are funds dedicated to green investing and funds that screen picks with social issues such as workers rights or gay rights in mind. Some funds say no to tobacco and alcohol. Others home in on corporate governance issues or divesting in parts of the world like Sudan. Yet others shun nuclear weapons or defense contractors.
But if someone wants to avoid all of the above, well, individual stocks might be the only option.
Another niche in the socially responsible investing world is shareholder advocacy -- where investors take an active role, voicing their opinions to management, voting for and against directors, and introducing shareholder resolutions.
For investors who want to avoid stocks, there are socially responsible bond funds and money market funds. There are even banks that use plain old savings deposits to support community development, such as the Sunrise Community Banks (which includes University and Park Midway banks in St. Paul and Franklin Bank in Minneapolis).
Who doesn't want to change the world? But let's face it: We need our investments to earn money, too. So does this socially responsible stuff pay off?
According to Morningstar, total annualized five-year return for U.S. socially responsible stock funds was 10.81 percent compared with 12.86 percent for all U.S. equity funds. But there have been multiple studies that say socially responsible funds do at least as well when compared with the correct benchmark.
David Kathman, the Morningstar analyst who covers socially responsible investing, said the issue is considering socially responsible investments as a cohesive group, since what they invest in can vary greatly. And like any classification of investments, there will be good and bad eggs in the carton.
When comparing funds, make sure you're comparing them with similar funds that aren't labeled socially responsible, and evaluating them as you would any fund -- with cost and track record in mind. As for cost, you may have to pay a tad more for screened funds because of all the extra work involved.
Another thing to keep in mind is that screening out certain types of stocks can result in a portfolio heavy in some sectors and light in others. For instance, Kathman said green funds typically have fewer industrial stocks and are overweighted in technology stocks. This could make your portfolio beat the market in some years and lag behind in others. But if you're in it for the long term, "that will tend to balance out," he said.
Besides, for socially responsible investors, getting the absolute best return isn't typically the motive, as long as they can meet their goals. Said Larson: "They're not just chasing the money, they're using their ideals."
Are you a socially responsible investor? Tell Kara McGuire. Call 612-673-7293 or send an e-mail to firstname.lastname@example.org.