After inventing the internet and spending eight years in the most useless job in the Clinton Administration, Al Gore has set his sights on a new target – Global Warming.
This one seems to have staying power. Going Green is all the rage these days.
Wall Street, always ready to make a quick buck by capitalizing on a trend, has quickly rolled out a number of investment vehicles for the eco-conscious investor. Hooray!
Yet all the hoopla can’t change the fact that energy is a volatile sector where results are often less about market forces and more about government legislation. Uh-oh!
The fascination with being good planetary citizens isn’t limited to the environment. Indeed, feeling good about themselves in any sense seems to be Corporate America’s cause du jour.
Current corporate and media darling Google is the quintessential example. “Our informal corporate motto is ‘Don’t be evil’” screams their investor relations webpage.
This love thyself attitude isn’t anything new. In fact, individual investors have been at it for years. So called Socially Responsible Investing (“SRI”) is great in theory but terrible in its application. Let’s take a look at why…
SRI aims to steer clear of “sin stocks” by screening out companies involved in alcohol, tobacco, firearms, gambling, nuclear power, hazardous chemicals, etc. as well as those with poor environmental, labor, product-safety or human rights records.
The problem aside from putting a secondary concern on par with the primary focus is that SRI is a conscious decision to give up market returns for the sake of feeling good.
Consider that two of the largest and most popular SRI funds along with an SRI index all trail the S&P 500. A hypothetical $100,000 investment in Calvert Social Investment Equity on 1/1/03 would have been worth about $150,000 on 12/31/06. Not bad, huh? No – except that the amount would have grown to about $174,000 if invested in the S&P 500. The result would have been about the same with Dreyfus Premier Third Century.
Indexing would have been somewhat better but still an imperfect solution. A hypothetical $100,000 investment in Vanguard FTSE Social Index would have grown to $166,000 – still about $8,000 shy of the S&P 500’s return.
Whether $8,000 less in an SRI index or $24,000 less in a managed SRI fund, the result is clear. Choosing to invest in an SRI fund is a conscious decision to accept lower returns.
These underwhelming returns are not limited to recent history. On average, the Calvert and Dreyfus offerings have underperformed the S&P 500 by 2.39% and 4.01% respectively for the last 15 years.
So what’s the better way? We suggest investing in the S&P 500 and using these “excess returns” against the very companies one is seeking to avoid. Don’t like Big Oil? – use your “excess returns” to buy a hybrid. Don’t like chemical companies that pollute the environment? – use your “excess returns” to fund cancer research.
Don’t like alcohol? – use your “excess returns” to start a local MADD chapter. The list goes on and on.
The hidden beauty of “sin stocks” goes beyond their contribution to overall returns – it’s that they tend to be recession-proof. After all, how many of us will stop buying beer and cigarettes should the economy slow?
Ironically, the SRI fad has spawned its own Bizarro Superman in the form of the Vice Fund. You guessed it. This fund invests solely in “sin stocks” and investors have benefited by it. The same hypothetical $100,000 investment from 1/1/03 through 12/31/06 would have outperformed the S&P 500 by close to $46,000! As Billy Joel put it, “I’d rather laugh with the sinners then cry with the saints.”