March 12, 2012; Source: Morningstar
Do you—or does your nonprofit or foundation—sacrifice returns by investing in socially responsible funds? Morningstar senior fund analyst David Kathman says that the answer is more complicated than a simple “Yes” or “No.”
Morningstar has looked at the range of secular and religious socially responsible investing (SRI) funds and has seen a range of performers. Kathman says, “There are good SRI funds and bad SFI funds,” meaning that SRI funds could outperform the market if the funds are run by proven managers.
He then suggests that different SRI funds do better or worse in specific market environments. For example, the Domini Social Equity fund outperformed the S&P index in the bull market of the late 1990s, in which technology stocks dominated, but did poorly in the bear market that followed when tech stocks plummeted. Similarly, because financials are big in the Vanguard FTSE Social Index, it suffered when the financial stocks tanked in the first part of the recession, but outperformed the market when financial stocks were the leaders in the 2009 market rebound.
“Over the long term,” Kathman writes, “these ups and downs even out.” He cites a 2011 study from the Journal of Investing that concluded that performance of the KLD 400 Social Index was basically the same as the S&P 500, all things considered. “In practice,” Kathman concludes, “it has been surprisingly difficult to prove that social screens make any significant long-term difference to investment returns.”
In other words, he concludes, “social screening is a ‘free good,’” in that it doesn’t really hurt portfolio performance over the long run. In the social sector, where nonprofits and foundations have assets to invest, it would seem that there’s not much of an argument against social screening. So why is so much of the foundation investment portfolio, for example, not in SRI funds?—Rick Cohen