DOING WELL BY DOING GOOD.
THINK SOCIALLY RESPONSIBLE INVESTING IS FOR DO-GOODERS WHO are willing to settle for lackluster returns? Don't tell that to Robert Cotten, a 51-year-old retiree whose portfolio of stocks and mutual funds was large enough to let him quit work a few years ago. Cotten, a former assistant general counsel for Hughes Electronics Corp. in Los Angeles, became a socially responsible investor back in 1985. At the time, General Motors had just taken over the company, then called Hughes Aircraft: Co., and Cotten, like his colleagues, received a retention package to stay an additional five years.
Then, he took the company's three lump-sum payments and contacted a stockbroker to put his money' to work. There was just one stipulation, however. "I gave him a list of things to avoid," he recalls. "I started off by telling him to avoid any company doing business with South Africa. Over rime, we crossed tobacco companies and nuclear weapons [makers] from the list."
That's not to say that Cotten suffered in the slightest for being picky. His retirement fund is currently returning enough to make living quite comfortable and allows Cotten a variety of side pursuits, ranging from studying Chinese in his spare time to sitting on the boards of a venture capital firm and two nonprofit corporations.
The moral of the story? In Cotten's words, "Socially responsible investing does pay off--you may not get the big bang of an Amazon.com, but if you stick with it, you'll realize some very good returns."
DECENT RETURNS WITH GOODY-TWO-SHOES FUNDS
Most goody-two-shoes funds have yet to outpace the broader market in 1999. As of May 7, the 67 socially responsible portfolios tracked by mutual-fund researcher Morningstar Inc. in Chicago, posted a year-to-date gain of 4.45%, underperforming the Standard & Poor's 500 Index's 9.85% return. However, socially responsible funds are loaded with technology shares, which should boost their performance over the long haul.
Still, socially conscious practices and good corporate performance are not mutually exclusive, according to Ann Kusumoto, a diversity consultant who has worked for companies as varied as AT&T, Hewlett Packard and BankBoston.
Says John W. Rogers Jr., president of Ariel Capital Management Inc./Ariel Mutual Funds, a Chicago-based socially responsible investment firm that runs the three top funds on the BLACK ENTERPRISE Black Mutual Funds list (see "A Rocky Climb," April 1999): "We may be looking for companies doing the right thing morally, but more often than not, that's just the right thing businesswise."
Besides good business practices, there are also a few other good reasons why many socially responsible funds have been champions of late. One stems from just what socially responsible funds invest in and avoid. Joseph Rocco, an analyst for Morningstar, says these funds generally shy away from companies in the tobacco, alcohol, gambling or defense industries --all sectors that have had troubles of late. Socially responsible funds also steer clear of industries that have environmental problems. At the same time they look for companies with good community relations or that promote workplace diversity. Because of those stringent criteria, you'll find that these funds often are well stocked with the same technology, healthcare, software or Internet shares that have blazed a trail through the market this year. "Firms like Microsoft (Nasdaq: MSFT), Cisco (Nasdaq: CSCO), Merck (NYSE: MRK), Johnson & Johnson (NYSE: JNJ) or SBC Communications (NYSE: SBC) have been big winners for socially responsible fund companies," says Rocco. "With holdings like those, you'd stand to do well in the recent market."
INVESTING WITH A CONSCIENCE
If you feel your conscience squirm a bit any time you think about investing, you wouldn't be alone. A 1998 survey sponsored by Ariel and discount broker Charles Schwab & Co. found that blacks seem especially sensitive to a number of issues when they're putting their money to work.
Where do you start and how do you get your funds working? Whether you're talking about retirement or tuition for your kids, you're in for some pretty hefty bills in the future. Therefore, it behooves you to find hard-working investments that will bring home the kind of gains you'll need to meet the obligations ahead.
It goes without saying that at the very outset, your choices are either stocks or mutual funds. By investing in a mutual fund, you'll essentially be hiring someone, a portfolio manager or team of analysts, to do the work for you.
That's the job of analysts like Bill Thomason, director of portfolio management for Parnassus Investments, a socially responsible firm in San Francisco. While Thomason says 80% of his work involves number-crunching--reviewing such figures as revenues, earnings growth and price-to-earnings multiples he spends the remaining 20% judging the behavior of a company. Corporate responsibility remains a deciding factor in whether Parnassus' mutual funds ultimately take a stake as shareholders. In fact, though Thomason says the process of screening for social responsibility makes up perhaps 20% of the work that goes into picking companies, there are a lot of hoops for those companies to jump through.
Eric Draper is another investor who has made money using his conscience. A realty consultant who evaluates affordable housing programs for nonprofit organizations, his activist streak goes way back. Draper, 45, was politically active when he attended the City College of San Francisco in the 1970s. He took part in protests against apartheid, petroleum companies and polluters. He was drawn to socially responsible investing as a way to use his money to make a statement as well. "I've always felt that I should take an active stance in the community," says Draper, "and given the fact that I was so politically outspoken when I was younger, investing this way made sense."
Today, the former firebrand has a wife, Salina, 33, and a son, Marcus, 10. In addition to taking care of their needs, he has an eye on his golden years. Draper, who worked a while as a broker for Charles Schwab, reseached socially responsible funds chose Parnassus Fund. He opened an IRA account, and has salted away $20,000 towards retirement.
He chose Parnassus because, like many of its socially responsible peers, it eliminates tobacco, alcohol, weapons makers and casino gambling companies. Next, its analysts look at each company's history to make sure management hasn't been cited for human rights abuses or exploitative labor practices either here or abroad. From there, the list of remaining companies is sorted according to financial criteria.
Since most socially responsible funds perform similar screenings and interviews to narrow their list of holdings, you might think that they're all pretty much alike. They aren't. The 67 socially conscious funds Morningstar tracks come in all sorts, and each takes a different approach to balancing market performance with corporate responsibility.
The Ariel Appreciation Fund and the Ariel Fund, for instance, focus on small and mid-size companies that have been overlooked by the market. Parnassus looks for "contrarian" picks, stocks with strong financials that are temporarily out of favor but poised for a turnaround. Dreyfus Third Century, managed by Maceo K. Sloan of NCM Capital Management, and Domini Social Equity funds concentrate on large-cap stocks, the big corporations that dominate the American economy.
THE TOP PERFORMERS
To give you a start sorting through the dozens of socially responsible funds out there, we screened the group at Morningstar's Website (www.morningstar.net). We ranked funds by average annual total return over the last five years; we normally judge funds on their three-year results, but chose a longer period this time. Our reasoning: socially sensitive investing is something of a specialty, and it makes sense to find companies that have been at it for a while. Secondly, the field of socially responsible funds hasn't grown that much over the past two years. Nine funds have joined the list since January 1, 1996, and five have been launched since the beginning of 1997. Finally, as with other BE funds screens, we looked for no-load funds, the type that won't hit you with a sales charge for depositing or withdrawing money.
Our top long-term pick was Domini Social Equity fund, which averaged 26.80% over the past five years. In 1998, the fund returned 32.99%, while it was up 7.24% as of April 30. The portfolio, true to its socially responsible mission, is heavily invested in such high-tech companies as Microsoft (Nasdaq: MSFT), Coca-Cola (NYSE. KO), and Merck (NYSE: MRK).
Of course, since no two funds are alike, we suggest that you read through a prospectus to see if your views and those of the portfolio manager jibe. Another consideration: just how socially responsible is the fund company itself? Ariel Capital Management, for instance, participates in scholarship programs in Chicago and has gone as far as starting a school on the South Side.
"In our eyes, it's not just how you invest," says Rogers, "it's how you act, as well."
TOP SIX PERFORMING SOCIALLY RESPONSIBLE MUTUAL FUNDS 5-Year Average Annual YTD(*) Fund (Ticker) Total Return(*) Total return Domini Social Equity 26.80 7.24 (DSEFX) Dreyfus Third Century 24.05 6.76 (DRTHX) Citizens Emerging Growth 23.83 1.05 (WAEGX) Neuberger Berman NYCDC 20.69 3.95 Socially Responsible (NBDCX) Aquinas Equity Growth 20.54 1.02 (AQEGX) Ariel Appreciation 20.19 3.81 (CAAPX) Min. Initial Investment Fund (Ticker) (IRA) Telephone Domini Social Equity $1,000 ($250) 800-762-6814 (DSEFX) Dreyfus Third Century $2,500 ($750) 800-373-9387 (DRTHX) Citizens Emerging Growth $2,500 ($250) 800-223-7010 (WAEGX) Neuberger Berman NYCDC $1,000 ($250) 800-877-9700 Socially Responsible (NBDCX) Aquinas Equity Growth $500 ($500) 800-423-6369 (AQEGX) Ariel Appreciation $1,000 ($250) 800-292-7435 (CAAPX)
(*) AS OF 4/30/993
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|Title Annotation:||ST; socially responsible investing|
|Author:||Anderson, James A.|
|Date:||Jul 1, 1999|
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