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.
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.
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.
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.
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.
But there can be drawbacks. He cites the case of AstroPower, a solar-power company with the greenest of products but a revenue stream that could have used a lot more green - that is, cash. Like Enron, another favorite among ethical investors at one time, AstroPower seemed to have artificially inflated its revenues before a sobering quarterly statement sent its stock price tumbling 50 percent in one day.
The lesson: Even green sectors have bad apples.
What's more, according to Kossian, investors who want to see environment-friendly products roll off each of their assembly lines might be missing out on many good companies who bless the world in subtler ways.
"When you start the other way around, you may be holding a number of mediocre companies and be depriving yourself of the full universe of stocks to choose from," Kossian says. "It's possible to end up with tremendous underperformance over a long period of time."
Kossian recommends instead considering ownership in any company with consistent earnings growth, competent management, and a unique advantage in its industry. Digging for those companies and weeding out the troublemakers could take lots of time, but as in yard work, a few powerful tools can save a lot of time and heartache.
Fortunately for today's time-strapped investors, analysts have sorted through reams of corporate data and posted rankings in myriad categories on the Internet. Find trustworthy rankings in areas relevant to your goals and values and you're close to knowing which stocks to pick.
Besides the Web, special-interest newsletters and magazines will sometimes publish lists of the best companies for their particular concern, such as human rights, disabled employees, or gay and lesbian issues. A more specific source, The Green Pages published by Co-op America, provides a directory of contact information for socially and environmentally minded financial advisers.
Diligent research, experts say, can keep investors from getting "green-washed," or duped, by slick public relations that put a happy face on a sad situation. Yet even with all these tools at their disposal, experts themselves are sometimes misled.
Archer Daniels Midland Co., for instance, was long heralded as the benevolent "supermarket to the world" for its international food-bank donations and underwriting of public broadcasting. But not until international press reports came out did investors become widely aware that the company was being sued for antitrust practices and price fixing in Brazil and Europe, according to Nikki Daruwalla, senior social analyst at Calvert Social Funds.
Publicly filed "information in its raw form is not very indicative of what's happening at a company," Ms. Daruwalla says. Investors can reduce risk based on faulty analysis, she adds, when they employ the analytical expertise of a socially responsible mutual fund.
Or they can take the approach of Mike Wood, a retired Delta Airlines pilot who trades stocks daily on his home computer in Hamilton, Mass. To advance his agenda to protect wildlife and limit population growth, he invests in whichever stocks seem poised to make money over a few days or weeks, and then he donates a slice of the profit to his favorite groups.
"Why not make $3,000 by trading Philip Morris in three days and give it to Greenpeace or the African Wildlife Foundation?" Mr. Wood asks.
Yet for investors who want stocks that proclaim uniquely what they stand for, the information age has ushered in the best opportunity so far to make really good money - in the broadest sense of that term.
The Internet now makes available to diligent investors a wealth of resources for customizing a portfolio with dividends for wallet and conscience alike. Here are some of those helpful websites:
• The Investor Responsibility Research Center (www.irrc.org) enables individuals to screen companies according to various social and corporate-governance criteria.
• Innovest (www.innovestgroup.com) rates firms according to risk, profit opportunities, and environmental friendliness. It also provides detailed written analyses.
• SocialFunds.com (www.socialfunds.com) analyzes socially responsible mutual funds according to values and performance.
• Ceres (www.ceres.org) publishes reports on corporate progress in environmental areas.
• IdealsWork (www.IWfinancial.com) sells software that analyzes stocks according to an investor's unique criteria.
• The Securities and Exchange Commission (www.sec.gov) posts required filings such as annual reports. Provides updates on such issues as labor relations.
• The Occupational Safety and Health Administration (www.osha.gov) posts violations and fines levied against companies with unsafe workplaces.