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How My 401(k) Turned Me into a Polluter, Pornographer
I turn off the lights when I leave a room. Sometimes I ride my bike instead of driving my car. I recycle my Vanguard statements.
Until this week, however, I had never checked whether the mutual funds I invest in through my 401(k) plan undo all these good deeds. Finally, I bucked up and screened my funds to see how socially (ir)responsible they are.
In less than ten minutes I had my answer. Here’s how I did it, in case you want to see whether your 401(k) is spreading good or bad karma in the world.
1.) Socially Responsible Investing 101: For background, I started by scanning these sites on socially responsible investing. (”SRI” to those in the know.)
2.) What’s my passion? SRI spans a wide range of issues ranging from the environment to gay rights to alcohol to gambling. I care about some of these issues more than others.
I should probably cut back on my trips to the local watering holes before I make a stink about the spirit stocks in my portfolio. On the other hand, I really do want to minimize my footprint on the earth, and I’m outraged by the travesty underway in Darfur. So I decided to screen my 401(k) for environmentally-unfriendly companies and those with links to Sudan.
I recommend focusing on one to three issues. Most screening tools allow you to screen one fund, one issue at a time. If you are holier than me you’ll need more than ten minutes.
3.) The Test: I used Calvert’s Know What You Own Service to screen my 401(k) investments. Calvert runs socially responsible mutual funds and provides this tool for free. It was an easy process: Enter fund name, select issue area and Voila! I instantly saw the companies in my fund that Calvert deems irresponsible. A link on the top of the page describes how Calvert makes its screening decisions.
I repeated the process for each of my mutual funds. In just a few minutes my 401(k)’s dirty secrets were revealed.
Invested Interests also provides a free tool with more screening options (like adult entertainment, which I also appear to be invested in), but I found it more cumbersome to use.
4.) Results and Reaction: Environmental Offender #1: Vanguard Energy Fund : 47% is invested in companies that are not environmentally responsible, according to Calvert. Not too surprising. It’s hard to capitalize on natural resources without disturbing Mother Nature. I need to choose between having pure green principles or this strong-performing fund - I can’t claim both. For me, this is a tough decision.
Environmental Offender #2: Vanguard 500 Index Fund: 27% is invested in non-green companies, according to Calvert. This one caught me off guard. I think I should be able to invest in U.S. stocks without worrying about whether I’m contributing to global warming.
I called Vanguard to see if I could switch to an environmentally-friendly U.S. stock fund. The representative told me my employer didn’t offer that option. I’d have to lobby my company to change the fund roster. Fortunately, this is an old 401(k) that I’ll be rolling over to an IRA with more fund options very soon.
Sudan Offender #1: Vanguard Emerging Markets Stock Index Fund : 5% is invested in companies that are doing business in Sudan, according to Calvert. Vanguard has resisted divesting from the country despite pressure from activists. Hmph. I am passionate enough about this issue to employ a zero-tolerance rule and also sign a petition . Conveniently, it’s time for me to pare back my emerging markets allocation anyway. The sector has been soaring for some time now.
Then the question lingers: Do my actions even matter? The world’s oil barons will hardly miss my monthly retirement contributions. But maybe if we all care a little bit, we can make a difference.
What do you think?
Photo: Flickr
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Thanks for this thought-provoking post. Your argument is intriguing and parallels the organic food movement; its emphasis on socially responsible food production, marketing and consumption. Maybe socially responsible investing is the next big thing. As consumers, we’re responsible for the choices we make whether we acknowledge them or not. So whether we’re standing in a grocery store check-out counter or pouring over our retirement plans, we ought to ask critical questions about where our money actually goes.
What have the returns been for socially responsible funds?
In the past, SRI funds tended to lag their relative indexes. But over the past few years they have matched, and in some cases outperformed, traditional mutual funds. Some argue that these funds have the potential to outperform in the long-run because their eco-friendly and social-friendly policies are more sustainable.
It’s worth noting that their fees are often higher than those of traditional mutual funds. And the menu of SRI funds available is a bit more limited – though growing.
Here is a link to Yahoo!’s directory of Socially Responsible Funds.
Here is a recent article from Morningstar about how to build a whole SRI portfolio.
So after fees did they still outperform other mutual funds? Also what is their beta and overall diversification compared to mutual funds?
Last question: Please explain the argument that eco friendly policies are more sustainable than coal and nuclear power. While they are awful for the environment they have proven to be much more reliable sources of energy compared to lets say wind mills.
Hi – thanks for these great questions.
Portfolio performance and characteristics vary depending on the manager and sector. Some funds have outperformed their peers net of fees and other have not.
For example, Neuberger Berman’s Socially Responsive Fund is outperforming, net of fees, the comprable Guardian Fund this year. These funds are actively managed large-cap growth funds and charge expense ratios of 0.90% and 0.87% respectively – which are higher than those of traditional index funds. They hold the same number of positions and their betas are similar to one another. Calvert’s actively managed Large Cap Growth Fund charges a higher expense ratio and a 4.75% load fee. This fund’s performance, net of all fees, is outperforming the Neuberger funds this year despite the hefty load. It has slightly lagged the Neuberger funds over three and five-year periods.
There are a few SRI index funds that charge low fees. Vanguard offers the FTSE Social Index Fund which has a large-cap growth tilt. The fund charges 0.24% compared to the Vanguard Growth Index Fund’s 0.22% expense ratio. The funds have a similar number of holdings and beta. But this year the Social Index fund’s performance is hurting.
I created a simple chart comparing these funds. Click here to see it.
The Social Investor’s Forum provides a comparison chart of many of the SRI funds out there. However, comparing these funds to traditional mutual funds takes some grunt work. I’d suggest starting with Morningstar’s Fund Compare tool.
Wading through the SRI fund world is tricky. We need to make sure a fund actually follows our social criteria, fits into our asset allocation scheme, and has the ability to perform net of fees. Plus, the universe of SRI funds is still small – so there are not a ton of options out there.
As for your second question – some analysts argue that companies that are smart about their environmental and social policies now (and think about how these policies might influence their bottom line) will gain an advantage over companies that ignore these areas. In turn, funds that invest in these companies might benefit from doing so. This is not to say that alternative energy sources are more reliable than coal or nuclear energy. Rather the argument is that forward social thinking might pay off in the future. The Wall Street Journal ran a good article on this topic earlier this month.
SRI creates a complex equation. I want to invest in responsible companies; however, some of the less socially responsible companies seem to be creating very positive economic benefit for emerging economies(growing the bourgeoise). Do you think that paring back on your emerging market fund could actually do more harm then good despite the travesty in Sudan?
