To understand socially responsible investing and socially conscious investing as a socially responsible investor, it is important to evaluate the risks associated with SRI, social investing, sustainable investing, and values investing through the vehicles of SRI mutual funds, socially responsible investment funds, socially responsible stocks, and socially responsible investments.
Socially responsible investing provides you with double returns – profits on a financial basis from socially responsible stocks and an ability to enact positive change on humanity. However, like every investment strategy, there are a set of benefits and disadvantages to social investing. In order to be an informed socially responsible investor, it is important to evaluate the risks associated with socially conscious investing.
The Satirical “Vice” Fund
To understand the risks of values investing, it is important to evaluate the performance of the non-socially responsible stocks that are specifically divested from the vast majority of social investing portfolios.
As a response to the growing popularity of socially responsible investing, Mutuals Advisors created the Vice Fund, which is a non-socially responsible investments fund that specifically selects “anti” socially responsible industries. The four specific sectors that the Vice Fund invests in are the gambling, tobacco, liquor, and defense industries.
Capitalizing upon human fallacies, the Vice Fund exploits the underlying addictions and internalized violence in society. Cited as inflation and recession resistant sectors, the “vice” industries have significantly outperformed the S&P 500. For the last five years, its annual average return has been 21.33%, beating out the S&P 500's 8.91% return significantly.
However, part of these tremendous numbers stems from defense companies’ increased revenues from US involvement in the Middle East. Therefore, depending upon the changes in the US presidential office, these returns may not be indicative of future gains.
Historically, the gambling, tobacco, and liquor industries watch their revenues rise as economies fall. Thus, a socially responsible investment portfolio will not have the advantages of these recession and inflation resistant sectors.
Social investing presents difficulties with diversification
In comparison to the full range of investment vehicles, socially responsible investments portfolios have limited options when it comes to diversifying across asset classes. With the growing popularity of SRI, socially responsible investors now do have the ability to choose between socially responsible investment funds, SRI indices, ETFs, and socially responsible stocks. However, it is difficult to fully diversify across all asset classes, thus exposing the SRI portfolio to additional risk.
On the other hand, some social investing proponents argue that the screens inherently filter out certain degrees of financial instability, and thus, the risk of a socially responsible investment may not necessarily be greater than the unscreened counterpart.
An investor can mitigate the disadvantage of social investing by properly balancing diversification in other asset classes, such as real estate or businesses. In addition, a SRI portfolio may choose to specifically seek out other non-vice industries that tend to be inflation resistant.
|
