Investing only in companies that agree with your politics isn't easy

Friday, October 4, 2013, Vol. 37, No. 40
By Hollie Deese

Patrons pray at a Chick-fil-A restaurant during a national day of support for the chain following backlash incurred when the owner made a statement supporting traditional marriage. Opponents of Chick-Fil-A’s conservative views have a tougher challenge if they wish to divorce their investments from mutual funds that support the company.

-- Shutterstock | Cheryl Casey

When it comes to voicing your opinion with your wallet, it’s easy to simply choose between stores you shop and stores you drop.

Don’t like Chick-fil-A’s financial support of conservative groups? Don’t buy a sandwich. Love that Hobby Lobby donates to Christian-affiliated groups. Buy stuff.

“I would rather shop at Hobby Lobby than, say, Michael’s, and I have spent a little bit more than I anticipated just to show my support for that business and their beliefs,” Franklin resident Jessica Smith says.

Madison’s Willie Betner, 74, agrees. “I don’t shop at Hobby Lobby a lot or Chick-fil-A, but I do believe in their beliefs. When Chick-fil-A had the protests, I went to support them and let it be known that’s why I was there.”

But when your money is tied up in your company’s 401(k) or 403(b), the companies in your investment portfolio are out of your control. Your 401(k) is made up of a variety of mutual funds, and each of those mutual funds invests in a variety of sectors in the financial market. If you don’t like one of them, getting rid of it is not as easy as declining that delicious chicken sandwich.

“Let’s say you don’t like Hobby Lobby,” says Troy Von Haefen, a NAPFA-Registered Financial Advisor and owner of Von Haefen Financial Management.

“A mutual fund inside your 401(k) plan may or may not hold Hobby Lobby. If it does, you can’t simply take Hobby Lobby out of that mutual fund. You would have to deny the whole mutual fund. But, that mutual fund may be the only large cap mutual fund that you have available that might give you the type of exposure that you need.”

The same holds true if you want to eliminate an entire segment as opposed to a single company.

“I see people who don’t want to own pharmaceutical companies, but it’s tough to eliminate an entire sector of the market, and it is tough on your return,” says Winnie Forrester, CFP and associate vice president of investments for Wells Fargo in Brentwood. Forrester specializes in socially responsible investing.

Instead of focusing on what you can’t do, there are a number of growing trends that can help align your beliefs and bottom line, and companies are making it much easier as they adopt certain practices and principles.

“We call it the triple bottom line,” Forrester says. “Basically, that is the usual financial bottom line, and then social and environment. Every corporation, in order to be viable and ongoing, has to take those three things into consideration.”

Sustainable, Responsible investing

First, decide what your particular concerns are. It could be the environment and sustainability. It could be human rights. It could be any mission, cause, ideal, passion. The industry has gone from calling this type of investing “socially responsible” to “sustainable and responsible,” making it more inclusive.

“When you say sustainable and responsible investing, that means we are involving environmental, social, and government factors,” Forrester says. “That just broadens the field and makes it much more of a science.”

Forrester looks at this type of investing as a three-legged stool that involves screening, shareholder activism and community development.

“You can say you don’t want to invest in the three sins stocks, tobacco, alcohol, gambling,” Forrester says. “You may not want to invest in environmental polluters, or guns, things like that.”

Of course, you can focus on the positive as well and opt to invest in companies who have women and minorities on their boards and practice sustainable environmental practices.

“Those kinds of things are becoming very much mainstream, and the average person in Tennessee may not be aware of it, but certainly corporations are, and that’s a big deal,” Forrester says.

A company will create a sustainability report for shareholders who ask for it, and people are asking for it much more now than 10 years ago. A sustainability report will give shareholders information about the economic, social, environmental and governance performance of the company.

She says in the last 10 years, if you were to ask for a sustainability report, you may have seen 5-7 percent voting for it. Now it’s not unheard of to see 40 or 45 percent, and even the majority of the vote.

Forrester says the screening part is important for individuals to feel better about their investments, but as far as social change, it’s not particularly effective. That’s where the second leg of the stool comes – shareholder activism.

“That could be as simple as voting your proxy and filing shareholder resolutions,” she says. “Anybody who owns stock in the company is entitled to vote their shares at the corporation’s annual meeting.

“There are people out there – nonprofits, religious organizations – that file shareholder resolutions trying to change the company’s business practices. Lots of mutual funds have a small army of people who do nothing but that.”

Community development is the smallest element, but some would argue that it’s the most effective and covers a lot of different things.

“It could be the community development of credit unions,” Forrester says. “It could be micro-lending. That attracts a lot of dollars because you could argue that that makes the most impact for your dollar. Most of my SRI [socially responsible investors] clients, not all, but the vast majority want all of their dollars in that.”

Return on investment

But what is best for a person’s beliefs may not always give the individual the best return. “Often, many of the socially responsible mutual funds out there are underperforming,” Von Haefen says.

“Most of them are actively managed funds that have certain constraints – we can only buy companies that don’t participate in pornography, or guns, or alcohol, or tobacco. They’re going to be limited to what companies they can buy, so it just makes it harder for them to perform well. You have to be really clear about what your objectives are.”

Instead, he suggests investing to capture the market, then carve out investment success for charities of your choice in addition to normal charity donations.

“I think it’s important that we all be charitable and work that into our financial plan,” he says.

However, Forrester feels that a socially-responsible investment plan can be as viable as other investments and the majority of her SRI clients only want to invest that way.

“It’s different for each investment, just as it would be for any investment,” she says. “So the best way to judge a portfolio or a mutual funds is to compare it against an appropriate industry.

“So where you have the S&P 500, there’s also an index for socially responsible companies, and the oldest one started in 1990 and was called the Domini 400.”

The Domini 400, founded by Amy Domini, includes companies with high environmental, social and government ratings and excludes companies involved in alcohol, tobacco, military, weapons, civilian firearms, nuclear power, adult entertainment and GMO.

As of July 31, 2013, the YTD return on investment for SRI companies on the Domini 400 was 23 percent compared to the S&P 500 YTD of 19.6 percent. The three-year annualized on the social index is 17.1 percent versus 17.7 percent on the S&P. And the five-year on the social index is 9.2 vs. the S&P’s 8.3 percent.

“So were talking about a fraction of a percent,” Forrester says.

“In 2012, there was $33 trillion in total US assets under management. SRI-managed assets of that $33 trillion were $3.74 trillion, so one out of every nine dollars is under SRI management. When we talk about growth, in 1997 when I began offering this, that number of SRI assets was $1.2 trillion. So it has tripled in 12 years.”

Think big picture

Getting the best return on your investment is key, and for some that could mean having a diverse portfolio that includes investments based solely on performance, not just beliefs and ideals.

“If you want to invest in a socially responsible way, you can’t do it without being cognizant of the other factors that come into play and that are important to investing,” Von Haefen says.

“There are many ways to skin the investment cat, and it needs to be a holistic process. If you don’t look at it from the big picture you could be shooting yourself in the foot. If you just want to be a socially responsible investor, and that’s all you do, you may not be able to retire like you want to.”

And even if you just can’t stomach the companies in your 401(k), Forrester says to think long term and just stick with it.

“I never recommend opting out of your 401(k),” she says. “Instead, I try to encourage them to look forward to when they retire and they have control of the assets.”