Penny Knuff
10/01/2005
For years, affluent investors aspiring to lay out their capital according to their values have sought socially responsible mutual funds. But these funds often limit investors’ options to a limited spectrum of concerns—abortion, adult entertainment, alcohol, tobacco—that are based on someone else’s definition of social responsibility.
Today, some of these forward-thinking investors are able to pinpoint investments that both support their particular causes and maximize their returns. That is the dual promise of using separate accounts in individual, tailored portfolios as vehicles for socially responsible investing. Financial advisors now have new sets of screening tools to identify and select specific companies that meet an individual investor’s definition of socially responsible investing. Investors can now communicate their preferences and construct a portfolio to reflect their choices.
One of our clients is a midwife with $11 million in net worth. She is passionate about holistic medicine and is wary of investing in pharmaceuticals. She is similarly averse to investing in fast food and tobacco companies.
A few years ago, it would have been difficult for her to develop a portfolio reflecting her specific social goals because most financial advisors would not have had the ability to parse the companies that met her criteria. Her likely option would have been to choose a socially responsible mutual fund. But she has been able to create a customized portfolio of individual securities by working with her financial advisor to choose categories of companies to favor or avoid. Her advisor uses Web-based software to tap into databases maintained by third-party screening services that parse thousands of companies.
The socially responsible investing sector is seeing a slow but steady increase in these types of services. In its most recent report on industry trends, the Social Investment Forum noted that total assets in socially screened separate accounts grew by 7 percent between 2001 and 2003. Dating back to 1995, when this approach was a fledgling strategy, assets held in separate accounts in the U.S. totaled $150 billion. Eight years later, that figure was nearly $2 trillion.
Fueling this development is a new generation
of investors who take a more active role in determining where their money is
invested. Constructing a socially responsible separate account begins with one
important question: How do you want your money to represent you?
We have
recognized three important steps to answering that question:
• Prioritize.
Determine what specific issues are most important to you. A seasoned investment
manager will begin the process with a detailed questionnaire inquiring into your
individual preferences. Are you an avid environmentalist? Are you against
outsourcing domestic jobs? The key is to determine what you are passionate
about, and then prioritize those passions.
• Choose from a wide range of
investment options. It is important to pick an investment firm that gives you an
array of investment choices, including both domestic and international stocks.
Once you have identified your financial and social goals, your investment
manager will begin constructing a portfolio, determining asset allocation and
picking stocks and bonds. If you start with a very narrow universe of stocks to
choose from, you will narrow your post-screen choices, as well.
• Do
not sacrifice financial goals for social goals. The perception surrounding
socially responsible investing is that it sacrifices investment returns for
conscientiousness. This need not be the case with socially responsible separate
accounts. First Affirmative Financial Network, an independent investment
advisory firm, has found that the performance of socially responsible separate
accounts tracks closely with the performance of socially responsible mutual
funds, asset class to asset class. Since its inception in 1991, the Domini 400
mutual fund, for example, has a 9.76 percent average annual total return. The
S&P 500 generated 10.44 percent per year over the same period.
Our
midwife client recently identified another social priority, sustainable energy,
so she is reprioritizing her social goals as they relate to her financial goals.
With a new breed of screening tools and a skilled investment advisor, she can
easily create a portfolio to address her preferences.
 | Penny Knuff is senior vice president of Fiduciary Trust International of California in San Mateo. |