Investors blend ethics with experience

While by no means the majority of ethical investors, more seniors are applying their values to their investments.

Over his six-plus decades, John Santosuosso has cultivated a soft spot for outcast nations, animals, and even plants. But none of that has kept him from earning hundreds of thousands of dollars in the stock market. To the contrary, he says, those values have for nearly two decades guided him to promising companies, often in far-flung places he's researched as a professor of political science at Florida Southern College in Lakeland, Fla. To him, a country known to brokers as an "emerging market" is sometimes "a good place to put money" in a moral as well as a financial sense.

"These places need capital," Mr. Santosuosso says. "If we are investing in these developing countries, that helps to create a climate where capital is attracted to them, so it's part of my overall socially responsible strategy. I might also add: It has been nicely profitable."

How profitable? His shares in a Brazil-focused DWS Scudder fund, for instance, are worth 10 times what he paid for them in the 1990s. His Templeton Russia Fund likewise delivered a five-fold return on investment in less than a decade.

Looking for profits from the developing world is just one of many lessons learned by seniors such as Santosuosso who have taken an ethical approach to investing. Now, some of these seniors, who've ridden various strategies through good times and bad in their lifetimes, are passing down hard-earned wisdom about what works and what doesn't for reaping profits from socially responsible investing (SRI).

Seniors by no means represent the majority of investors in SRI mutual funds. One 2003 survey, the most recent available, found that seniors make up just 5 percent of investors in Pax World Funds, for example.

But seniors who do take an SRI approach have often been investing longer than their younger counterparts. That gives them more time to accrue tales of what works and what doesn't. And while SRI requires a special intentionality among younger investors, the venture probably comes as second nature to senior citizens - at least when they think about it, according to Ron Manheimer, director of the North Carolina Center for Creative Retirement at the University of North Carolina at Asheville.

"As people get older, they get interested in biographies and history and how they fit into the larger picture of things," Mr. Manheimer says. "There's an interest in, 'What will outlast me?' They're starting to think more long term in terms of legacy. [Ethical investing] may fit in very well with that mind-set if it carries over into what they're putting their funds into."

For Joan Elbert of Chicago, a lifetime of activism on affordable- housing issues has colored a passion for certain types of investments now that she's a divorced retiree. On one level, she's found that mutual funds from Calvert suit her preference for "stable" investments: "It's so good when you get this [statement] in the mail, and it isn't a minus," even during the corporate scandals of 2002 and 2003. And she likes the fact that they shun the stocks of weaponsmakers.

More proactively, she put $5,000 into the Federal Low-Income Housing Tax Credit Partnership about 10 years ago. Investors help finance low-income home construction by committing their dollars for 15 years, taking annual tax credits, and hoping they can sell their stake in an appreciated real estate market when the term is up.

Her contribution wasn't big money, Ms. Elbert says, but it earns her enough of a tax credit on her $39,000 annual income that last year she received a $14 refund from the Internal Revenue Service.

"This [investment] has made the difference" between paying annual income taxes and not paying any, she says. "It was a federally approved write-off for something I felt was really good" for society, she says, especially at a time when urban rentals are fast becoming condominiums.

Elbert's money manager, the Chicago-based Social Equity Group, has welcomed an influx of seniors to its mission-driven investing in recent years. About 1 in 4 of the firm's 500-plus clients was a senior citizen in 2002. Now it's about 1 in 3.

"There has been an increase [in interest from seniors], especially in the years since the bear market," says Ron Freund, director of client management in the firm's Berkeley, Calif., office. Seniors concerned about preserving assets were aiming to steer clear of scandal-prone companies, he says, and saw social screening as "a risk-reduction benefit to social investing."

Joe Gerhards, a retired engineer in Concord, Calif., was fairly content with his conventional investing strategy until shortly after George W. Bush became president in 2001. As one who opposed Bush's policies, he became uncomfortable with what he saw as his "fundamentalist Christian" money manager's "pro-Bush" orientation and instead sought out two new money managers (Mr. Freund is one). He charged them to act on his concern that "corporations are basically ruling everything, and somehow we have to dampen that down."

Now he operates in a narrower universe of potential investments. His stocks and mutual funds include no producers of what he regards as "unhealthy" products: alcohol, gambling, weapons, tobacco, and nuclear power. He's also sought out companies such as Sharp for their commitments to developing solar power.

After these adjustments, Mr. Gerhards says his portfolio has been generating superior returns, averaging 8 to 9 percent annually over the past five years.

"After seeing the dotcom crash here a while back," Gerhards says, "I came to the conclusion that trying to maximize your money is probably a little less efficient [than accepting slightly lower returns] over the long haul." By investing in "socially conscious corporations, your risk level goes way down because they're not just looking at the bottom line. And it's certainly much more peaceful. I can sleep much better knowing I'm doing something to manage corporate responsibility," he says.

Looking back at his mistakes, Santosuosso, the Florida Southern professor, says more vigilant social screening might have sometimes helped keep him out of trouble. Example: He once lost 80 percent of his investment in an obscure Alaska gold mining company, one he says probably wouldn't have passed environmental muster.

But having high ethical standards can also lull investors into complacency, according to Santosuosso. He says he held for too long his stock in Nortel, a Canadian communications firm that joined the Dow Jones North America Sustainability Index this year. He watched as a profitable track record vanished. His lesson for other ethically minded investors: Don't get greedy - or self-righteous.

"The two greatest evils that plague investors, particularly socially responsible investors, are greed and fear," Santosuosso says.

SRI investors in particular "may sometimes start to think that because they are socially responsible, 'Surely, I wouldn't fall prey to that.' Hah!" Santosuosso says. "You're just as vulnerable as anybody else."

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