Lately, I have been wondering about how socially responsible investing (SRI) stacks up against conventional fund investing. When I think SRI vs. conventional, I think of a mutual fund that contains all green companies versus a mutual funds that has a diversified mix of companies, which could include large oil and gas companies and even a tobacco company or two. According to the Social Investment Forum, they have a list of socially responsible mutual funds (not necessarily just green)...and they designate which funds invest or have a interest in companies that are associated with alcohol, tobacco, gambling, defense and weapons, animal testing, environmental measures, human rights, labor relations, etc. The forum estimates that 9% of all investments are now made with social values in mind. But do socially-minded mutal funds do as well as say a mutual fund that doesn't discriminate investment decisions based on social responsibility? Morningstar (search SRI) has attempted to compare the returns on a socially responsible fund versus conventional fund. As of mid-October 2006, SRI funds returned 7.6 percent, compared to 9.7 percent for funds invested in the broader stock market (S&P 500). Over the past three years, SRI funds have returned
an average of 8.8 percent, while the market returned 12.3. This is not surprising to me considering the fact that many oil and gas companies probably comprise a part of the conventional fund portfolio and they have been experiencing record profits. I definitely feel ripped off when I pay close to $3 a gallon for gas and then read the next day in the WSJ that Exxon and Shell are experiencing world-record profits...better than expected quarters...beating analysts expectations...tough for an SRI to compete with that right now. But the idea is that by investing in a socially responsible fund, you are giving money to companies that are not exploiting the environment or compromising human rights in the process. In the long run, by investing in companies that focus more on their impact in the community and on the world, as opposed to just meeting quarterly earnings expectations, you will have better returns because you are a "healthier" company...avoiding costly future litigation because you exploited people or the environment, which leads to a drop in stock price. On paper, this theory looks good and it would be nice if investments worked that way. One thing I do know, if investors demand socially responsible funds to invest their money, the market will eventually respond with a vehicle to meet those needs. A quick comment on real estate. REIT's (Real Estate Investment Trusts) could see some strong gains in the coming years as green building (and green technologies) becomes more mainstream and widely implemented...and as investors realize the effect green technologies have on operating margin and overall ROI. REIT's are designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. And as always, I welcome any comments you might have on this topic.
I will have to disagree on REIT's. While the impact of green technologies and approaches might be what you think they are, REIT's are so overvalued at this point it really doesn't matter. REIT's primary return is from their yield, which is at this point well below anything I have experienced and significantly below that of Treasury bonds. This yield is not tax advantaged like traditional equities to boot.
Posted by: Lance Paddock | December 27, 2006 at 09:17 AM
Lance, thanks for the comment...I really appreciate the thoughtfulness. Plus, I really enjoy hearing other people's opinion on real estate issues, especially how green technology influences real estate. So, let me clarify a bit...as it stands, and as far as I know, there are no green REITs. I believe that part of this stems from the fact that there is no incentive for REITs to invest heavily in green properties because the tenant or a third party management company typically bears the burden of the energy costs, not the REIT. So, my original line of thinking was that if there were such thing as a green REIT, over the long-term (10-15 years), they would experience stronger operating margins, which would offset any premium they might pay to purchase or build the sustainable structures-->leading to a healthier investment and making the green REIT a good diversification to an investment portfolio.
Posted by: Garrett | December 27, 2006 at 11:47 AM
I think that may be a good point, and it would certainly make sense for REIT's to consider such approaches even if they were not "green" per se.
Posted by: Lance | December 28, 2006 at 12:27 PM
REIT's are designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Posted by: James Morgan - Puritan Financial Advisor | October 10, 2010 at 07:46 PM