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The do-it-yourself ethical investor

Investors who feel socially responsible mutual funds don't fully reflect their values can build a portfolio of their own.

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / May 17, 2004

When T. Rowe Price portfolio manager Pam Kossian asks new clients what ethical investing means to them, she can never be sure what they'll say.

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Example: One client refuses to own stock in any company that makes condoms because the Roman Catholic Church regards contraception as immoral interference with the procreative act. But another client actually insists on owning such shares in order to help control population growth and stop the spread of sexually transmitted diseases.

Denise Mallett, director of client services at IdealsWork Financial in Portland, Maine, knows the feeling. In working with clients who use IW software to pick suitable stocks, she has several who won't touch tobacco. But she also has others from North Carolina who seek out tobacco holdings precisely because the golden leaf pays for schools and other good things in their state.

"The problem is, what's socially responsible to one person is not socially responsible to someone else," Ms. Mallett says. "Portfolios need to be customized to reflect the values of an individual investor."

In an age when consumers can get everything personalized from a Volvo to an Internet browser, ethically minded investors are finding their portfolios, too, can reflect a unique, even eccentric, set of values. Rather than settle for the priorities of one mutual fund or another, enterprising investors are buying shares only in the companies they respect and are building their own dream teams as a result.

Building such a custom portfolio brings additional challenge to the already tricky task of selecting winning stocks, since these winners must now come solely from a select pool of honorable companies. And to avoid those firms whose slick public relations hide a less-than-pretty reality, these investors could find themselves with a considerable research project on their hands.

But to get the job done quickly and efficiently, there are certain steps an investor can take.

Step one: Setting a policy

When customizing an ethical portfolio, investors should begin with a personal policy statement that spells out goals, screening criteria, and an allocation plan, says financial adviser Bernie Kent of PricewaterhouseCoopers in Detroit. A sample policy might aim for a 3 percent return over inflation, for instance, and avoid vice products - tobacco, alcohol, gambling. And if this investor strongly supports the war in Iraq and wants to invest in defense contractors, he or she could insist on that criterion as well.

No matter how much a person loves one company or industry, however, Mr. Kent says a policy needs to dictate diversity to ensure against a preference-driven imbalance. His bread-and-butter formula is to spread investments across large-cap, small-cap, and international stocks; to include as many industries as the screening criteria will allow; to own stock in at least 25 companies; and to put no more than 5 percent of assets in any one company.

"If there's a certain major industry that you leave out, you can skew results," Kent says. "To avoid casinos or tobacco only wouldn't be a problem. But to avoid pharmaceuticals or healthcare altogether can create greater risk for your portfolio" by limiting its diversification.

Clients don't need to compromise their unique social standards, however, to invest profitably, says Ms. Kossian at T. Rowe Price in Baltimore. Never has she had to tell her clients that their screening standards were too onerous. Even the retired psychologist who refused to invest in notoriously stingy health-maintenance organizations, and the mother who avoided vaccinemakers because she felt they had caused autism in her son, were able to craft moneymaking portfolios that upheld their personal values.

Step two: Identifying possibilities

Once a personal policy is set, the challenge becomes finding companies poised not only to prosper but also to put the stamp of your values on the world.

At this stage, Robert Berridge, a vice president at Green Century Capital Management Inc. in Boston, would apply his own thorough formula. But for those with less time, he offers a tip: Limit your range of options to companies with ethical products.

"There are no real rules of thumb for ferreting out what a company is doing from what it says it's doing," says Mr. Berridge. "They may say they donate to this or that cause, but maybe the core of what they're doing is not so good."

So, rather than spend days combing through corporate histories, Berridge suggests finding the best companies involved in the most ethical enterprises. Look among organic grocers, for instance, and consider a solid company like Whole Foods Market, he says. Or consider makers of alternative-energy products, such as Vestis, a manufacturer of wind turbines.

This technique saves time, Berridge says, and virtually guarantees that every holding in the portfolio is an ethically minded company.