Why Socially Conscious Investing May Be Costing You A Lot Of Money

by Hank Coleman

Oil spill on the beachHave you heard about socially conscious investing? Socially conscious investing basically means that you or the mutual funds that you use will not invest in companies that do not promote the social good. This takes entire industries like alcohol, gambling, gun manufacturers, potential environmental polluters  and the like out of the investing mix of potential companies in the possibilities for your investments.

Several mutual funds have gravitated to this investing style as a way to market and differentiate themselves from the masses of funds that comprise the investing universe. Socially responsible investing (SRI) mutual funds look to limit or restrict their investments in companies that promote what the general public would consider vices.

They shy away from investing in companies that are seen as environmental polluters, makers addictive substances like alcohol or tobacco, and other companies. Many of these mutual funds have also removed themselves from investing in companies that have been seen as having bad corporate governance policies and practices. They have also shunned companies with suspected human rights violations.

Socially Conscious Investing Mutual Funds Have Gained In Popularity

Socially conscious investments and socially conscious investing mutual funds has exploded in popularity in recent years. The number of socially conscious investing mutual funds or socially responsible mutual funds in the United States has grown to over 250 with assets of more than $300billion as of 2010, this is up 30 fold since their inception in 1995. According to InvestmentNews.com and Morningstar.com, socially conscious investing mutual funds have had over $3 billion in net inflows into these types of funds in the past three years ending in 2012.

So, What’s Wrong With Socially Conscious Investing?

Human rights violations, corporate board misbehavior, pollution, you may be asking why this would even need to be discussed. No one wants to actively invest in companies that commit these atrocities  And, you’re right for the most part. But, there is a flaw in this investment strategy though. These mutual funds and their investors often are too restrictive.

When you buy shares in a mutual fund that restricts what the fund manager can invest in and companies he or she can buy shares in, you must to be willing to accept the possibility of lower rates of return for your investment than you would have normally received in the stock market. This is in exchange for investing in causes or things that are important to your own morales and beliefs.

There are so many profitable companies that are left out from investors in these socially conscious investing mutual funds that you would not normally shy away from. Many of the companies that socially conscious investing mutual funds disgard are many that you probably use every day.

It can also be hard to understand which stocks fit a socially conscious investing mutual fund’s purchasing criteria. For example, Apple has notoriously had issues with its labor practices in the factories that it uses overseas. Should that eliminate this stellar company with great stock price returns from consideration for you to invest in?

Many socially conscious investing mutual funds think that it does merit exclusion from their investments. The same can be said for large oil companies that we depend on in America day in and day out because of their often negative environmental impacts. While these may or may not seem like a big deal to many investors, simply excluding these types of companies can quickly get an investor’s portfolio out of sync with the overall stock market’s rate of return if he or she is not careful.

Is Socially Conscious Investing Profitable?

Lets face the facts. We didn’t get involved in investing to sit on the side lines and not earn a profit. The entire mantra of a publicly traded company is to earn a profit for their shareholders. While it is not recommended that companies do so at the expense of society as a whole, it is not a good financial practice for investors to simply write them off completely either.

Socially conscious investing mutual funds have initially lagged the stock market’s indices during their inception, but as more funds have entered the marketplace, they have rallied in recent years to closely keep up with the overall stock market averages.

One area that is of concern though is the fees that socially conscious investing mutual funds charge their customers. SRI funds can often have an annual expense ratio of over 1.20%. This is often on top of a upfront load or sales charge that they charge their investors which can often be as much as 4% or more. The expense ratio of many, but not all, of these socially conscious investing mutual funds can approach 1% annually as well.

So, should you invest in socially conscious investments? While I am not a fan, I can understand their allure to investors. I would just caution you to read the prospectus carefully. Understand the fees and expenses that these funds charge their investors. You should also know exactly what a socially conscious investing mutual fund will and more importantly will NOT invest in. You may be surprised at how strict they are and how they might not mirror your beliefs after all.


Morningstar Stock Fund Investment Research

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and is currently pursuing his Certified Financial Planner credentials. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 535 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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