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Socially responsible investing: How to look for funds

At a glance:

  • Establish which issues are most important to you

  • How does a fund screen investments?

  • How to figure out if a fund is involved in shareholder activism and community investment

  • How to decide if certain funds work in your portfolio

  • Summary of socially responsible investing

No politics, no religion. We're taught to avoid delicate subjects at the dining room table. There's no longer any need to avoid these issues when it comes to investing, though.

Now, investors can adhere to their values using socially responsible funds.

Very broadly, socially responsible investing (SRI) weaves values-based, non-financial criteria into the investment process.

But that definition is pretty broad. The SRI label can apply to various, even complex, investing strategies. Despite the complexity, there are really just five basic questions you need to answer when looking for an SRI fund.

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Establish which issues are most important to you

Before getting bogged down in reams of information about different socially responsible investing (SRI) funds, examine your own values.

Which issues are driving you to become a socially conscious investor? Do you simply want to avoid investing in alcohol and tobacco stocks? Are you especially concerned about the environment? Are issues of workplace diversity critical to you? Do you want to avoid weapons makers?

Faith or not?

Once you've identified the issues that mean the most to you, decide if you'd like a religious or a secular fund.

Some of the largest and best-known SRI funds, such as Pax World Balanced (PAXWX), TIAA-CREF Social Choice Equity (TISCX), and the Calvert funds, are secular funds. They usually avoid weapons makers and nuclear-power, alcohol, and tobacco firms.

In addition, many secular SRI funds look for those companies with the best environmental, human-rights, and workplace-diversity records.

A growing number of religious offerings cater to an assortment of denominations.

The Praxis funds are designed for Mennonite investors, the Ave Maria and Aquinas funds serve Catholics, the Amana funds were created for Islamic investors, and the Timothy funds serve conservative Christians.

The majority of religious funds avoid alcohol, gambling, and pornography stocks, but their screens vary widely in other ways.

For example, because of an Islamic principle against usury (interest), the Amana funds don't invest in bonds or many financial stocks.

How does a fund screen investments?

Once you decide which social responsibility screens are most important to you, it's time to find the closest match.

You might start by looking at Websites that provide details on socially responsible investing.

The most complete Website of how SRI funds screen companies is the Forum for Sustainable and Responsible Investment.

Accurate information about a fund family's screening efforts is also often available on the firm's Website.

Moreover, prospectuses and annual reports carry basic information about the types of social screens that the funds use. SRI customer-service representatives should also be able to answer your questions.

Finally, examine a recent portfolio of any SRI fund you're seriously considering. Sure, a fund may say it uses environmental screens, but are those screens stringent enough for you?

For example, one fund takes a relative approach to screening. That is, the managers look for the companies in each industry with the best workplace and environmental records. That means, however, that the fund owns an oil-exploration company.

Investors seeking stellar environmental records may not be that comfortable owning even the most socially responsible oil-exploration firm.

How to figure out if a fund is involved in shareholder activism and community investment

No corporation will clear all socially responsible hurdles.

A company may have an excellent environmental record, but it may not provide the best working environment for its minority employees.

If SRI funds demanded perfection from every company they owned, they would never buy anything.

Thus, some fund families use shareholder activism to challenge the policies of some of those companies they do own.

Because shareholders own the company, they can push for it to change.

Other times, funds simply engage the firm in a discussion, quietly pressuring the company to make alterations to the policies it considers unpalatable.

To find out if a fund you're considering engages in shareholder activism, visit its Website or call the company itself.

How to decide if certain funds work in your portfolio

Just because you want to invest with your heart doesn't mean you should risk losing your shirt.

Socially responsible investing funds can perform just as well or even better than their non-socially screened peers. But there are some poorly performing SRI funds out there, and you should avoid those as you would any bad fund.

Also, find out how expensive the fund is. You'll probably have to pay more for your socially screened funds.

That's because such funds are typically smaller than their nonscreened peers, and smaller funds tend to have higher expenses.

Higher expenses may also reflect the additional research required to determine whether or not a company passes the fund's social screens.

How do they work in my portfolio?

Do you want an entire portfolio of funds that match your values, or are you comfortable with just one or two SRI offerings?

There are socially responsible funds available in all major asset classes, although they're not equal in quality or quantity. SRI funds focusing on U.S. companies are the most plentiful.

However, there are fewer SRI bond and international funds.

If you can't find enough suitable funds to build an all-SRI portfolio, you might simply choose one SRI fund to serve as a good large-cap core holding.

After all, the largest companies are likely to have the biggest impact on the issues you care about, so why not focus on the big guys?

There are a number of respectable large-cap funds available to socially conscious investors, including Domini Impact Equity, Pax World Balanced, and Amana Income (AMANX).

Summary of socially responsible investing

In the old days, people who wanted their money to match their values were usually out of luck when it came to investing.

This changed some decades ago when enterprising individuals declared that one could indeed become wealthy while sticking to his or her values.

Now there is a big range of opportunities to choose from — not just with mutual funds, but also with individual stocks and bonds.

As with any investment program, it helps to first figure out what your burning issues are so that you can match them with investments that will help you feel that your money really is making the world a better place.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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