At the beginning of a client relationship, we ask new clients whether or not there are any constraints that we need to be bound by in managing the investment assets. Ninety-nine times out of a hundred, there’s nothing to worry about other than assets with a low cost basis and, therefore, a lot of potential capital gains taxes.
In addition to any tax considerations, we want to know whether an investor wants their portfolio to be ‘socially responsible.’ A socially responsible investment (or SRI) strategy can mean different things to different people, but is basically a way for an investor to express their moral values through their portfolio.
Some investors don’t want to own defense manufacturers because they are pacifists, while others want to avoid companies that pollute the environment or profit from unhealthy habits like cigarettes or alcohol. Others still may want to avoid companies with unfair labor practices.
There are even funds designed to meet religious requirements like the Ave Maria family of mutual funds that are consistent with Catholic values or the Amana family of mutual funds that follow the principles of Islamic finance.
In general, Acropolis doesn’t pursue SRI strategies unless directed by clients. First, we don’t intend to impose our moral views on others. Second, adding constraints applies explicit and implicit costs on returns since high performing stocks may be excluded or reducing the number of available opportunities can negatively impact diversification.
Most of the time, when we bring this up with new clients, they simply don’t have preferences along these lines and are more concerned about the possibility of lower returns.
Some of those concerns may be unfounded. We haven’t done an exhaustive study, but it appears that many SRI funds compete well with traditional benchmarks. The oldest SRI index, the KLD 400 has actually outperformed the S&P 500 by about a half a percent per year since it was created in 1990.
Now, maybe virtue can be profitable, but I always crack up when I get spam from the Vice Investor fund (ticker symbol: VICEX).
These folks must really contrarians (and reactionaries) because they take the exact opposite approach and buy only tobacco, alcohol, defense, and casino stocks. Over the last ten years, while the S&P 500 has gained 6.71 percent, the Vice Investor has earned 9.65 percent.
As Pope Francis recently said, ‘Who am I to judge?’