Ethical investments: A shelter from the stock market's storms?
Socially responsible funds may screen out bad apples, but they haven't escaped market volatility.
from the March 26, 2007 edition
Page 3 of 3
Ethical screens may lower risks
Mr. Jabusch concedes that a heavy weighting in financials increases risk due to lack of diversification, but he says the strategy also reduces volatility in certain circumstances. Specifically he argues that because the Sierra Club fund steers clear of oil producers and fossil fuel-burning utilities, it provides stability when energy markets are volatile. When energy slumped in 2003, he notes, the fund outperformed the S&P by 6 percent. Conversely in 2006, when oil enjoyed strong growth, the fund lagged 5 percent behind the S&P.
SRI boosters insist that social screens do, at important times, ferret out particular risks responsible for a market downturn. A classic example occurred in 2002, according to Julie Gorte, vice president and chief social investment strategist at Calvert Funds. Sensitive to lawsuits, citations, and other warning signs of unscrupulous management, Calvert's Social Equity Fund had by 2002 already weeded out many firms that would suffer scandals and drag down other funds' portfolios, including Tyco, WorldCom, and Rite Aid.
As a result, Ms. Gorte says, the fund ended the year down just 14.9 percent while the S&P lost 22.1 percent.
Ultimately, risk-averse investors with an ethical bent and a short-term horizon need to judge whether particular funds have the right screens in place to mitigate factors that are apt to hamper stock prices in the near future.
Those who aren't satisfied with their current position have options, according to Mr. Scheuth, such as taking shelter in a socially screened bond fund. And for those who prefer to see money in the bank during periods of uncertainty, he recommends community development banks that have social missions and competitive rates on certificates of deposit (CDs).
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