When a client at Columbia Financial Planning LLC looked at her statements and realized that Exxon Mobil Corp. (XOM) was a top holding in one of her portfolio's core funds, she was less than thrilled. “She was shocked,” said Heidi Davis, a financial adviser at the Bellevue, Wash.-based
financial planning firm. “She didn't want to own any oil companies.”
After looking at the available options, Ms. Davis moved the client out of her S&P 500
index fund and into the $586 million Vanguard FTSE Social Index Investor Fund (VFTSX), which invests in an index that screens for companies that FTSE considers to be working toward environmental sustainability, developing positive relationships with stakeholders and supporting human rights issues. Consumer goods giant Procter & Gamble Co. (PG) is the fund's top holding.
The client is happier because now she can invest without compromising her values, Ms. Davis said.
More and more investors are following in those footsteps and choosing investments that don't conflict with their core beliefs.
There are almost 200 mutual funds holding a total of $60 billion in assets that focus on socially conscious investing, according to Morningstar Inc. Over the past three years, the funds have had more than $3 billion in net inflows.
“We're seeing more interest in socially responsible investing as investors move from just thinking about what kind of companies they don't want to invest in, to thinking about what kind of companies they do want to invest in,” said Ingrid Dyott, co-portfolio manager of the
Neuberger Berman Socially Responsible Fund (NRRAX). “There are multiple examples of how social and environmental issues can have a meaningful impact on companies.”
LOTS OF OPTIONS
However, there is a lot of leeway in the definition of socially conscious investing, and no two fund companies have the exact same approach. In general, they all screen out companies involved in the tobacco, alcohol and firearm industries, but after that, there are a lot of options.
Over the past few years, there has been a shift in socially conscious funds.
Rather than just using negative screens, more are looking at a firm's social and environmental impact in addition to what industry it is in, said John Liechty, founder of Integrated Financial Planning Solutions LLC.
“The whole industry has evolved quite a bit,” he said.
Oil companies, for example, have a reputation for being environmentally unfriendly, as Ms. Davis' client believed, but there are some that are actually working on being more environmentally friendly, Mr. Liechty said.
ConocoPhillips (COP), is one such example, he said.
The addition of more data points, however, leads to more differences in criteria among fund companies.
“It's definitely confusing to everyone,” said Cary Krosinsky, senior vice president at TruCost Inc., an environmental-data research firm. “Part of it is the industry; they don't mind if everyone thinks they do everything. But what specific granular approach a company takes to socially responsible investing is actually quite important,” he said.
Ms. Dyott said that the differences in approaches to socially conscious investing aren't any different than what an investor would find in any other asset class. “Most managers have different opinions on what classifies as a growth or value stock too,” she said.
Another factor that has given investors more comfort with socially conscious strategies is that they don't necessarily have to give up performance as a result.
There have been many studies attempting to determine whether adding social screens helps or hurts a mutual fund's performance, but the vast majority have found that in the end it's neither a plus or negative, said David Kathman, a mutual fund analyst at Morningstar.
“In theory, if you're working with a smaller universe of available companies, you should have lower expected returns, but in practice, we haven't seen that at all,” he said.
The Neuberger Berman Socially Responsible Fund, and the Neuberger Berman Guardian Fund (NGDAX), which is not a socially conscious fund, have the same management team and usually have about 80% of their stocks overlapping, said Mr. Kathman. Over the past three years, the two funds have had nearly identical performance.
Mr. Liechty uses both socially conscious-only client portfolios and portfolios that don't incorporate such funds, depending on clients' preferences as determined in a fact-finding questionnaire. He hasn't seen any noticeable difference in performance. “It's very similar,” he said.
INDEX FUNDS
Socially conscious index funds also have proved to hold up well. The iShares KLD 400 Social Index ETF (DSI) and the S&P 500 have returned within 40 basis points of each other on an annualized basis over the past five years.
However, although socially conscious screening doesn't seem to affect performance, there are good and bad portfolio managers, just as in any other fund category, and that can affect performance, said Mr. Kathman.
Jennifer Lazarus, founder of Lazarus Financial Planning, said she's confident of the performance of socially conscious funds, but what's more important is that they appeal to the kinds of clients she wants to work with, namely those who have beliefs similar to hers. “I want to work with the stereotypical Prius owner who's putting solar panels up on their roof,” she said.
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