In August 2006 the Sierra Club partnered with Forward Funds to continue to provide a financial product to its environmental focused membership. The Sierra Club established environmental and social guidelines that companies must meet in order for the Forward Fund investment managers to invest in them. Forward Fund operates two mutual funds under the Sierra Club name. The Sierra Club Equity Income (SCFLX) fund is in the moderate allocation category. The index that it is measured against is the Dow Jones Moderate Portfolio. The Sierra Club Stock (SCFSX) fund is a large-capital growth fund that is measured against the S&P 500.

The Seattle Times ran an article Friday, May 25 on “green” investing that screams for scrutiny. Their claims in the article are simplistic and unsubstantiated. This quote sums up the piece:

But while ‘green’ investing may be good for the conscience, it’s not always good for the wallet. Nor does socially conscious investing necessarily lead to changes in corporate behavior the way consumer-product boycotts might.

Investing in stocks and mutual funds is not a financial vehicle that guarantees a return and “green” investing is no different. The fact that there is a possibility that an investment will decline in value is inherent in the system. To pull “green” investing out of the universe of investment models and claim that an individual could lose money is misleading and vague.

My mutual fund and stock trading practice is not generally affected by short-term changes in the Dow, NASDAQ, or S&P 500. I do, however, watch these markets daily. By watching the markets I feel I have a better view of the environment when I do buy or sell at a particular time. This last week was relatively bumpy and this coincided with a recent sale and purchase of two mutual funds.

On Tuesday, May 7 I sold a large percentage of my stake in the mutual fund FBR Small Cap. (FBRVX). This sale was initiated by the weak performance of FBRVX. It has been lagging its index, the S&P 500, when compared to 1-month and 3-month benchmarks. This has been a strong fund for me, however. I bought my initial stake on January 9, 2004 at $33.31. Since then I have balanced my portfolio a couple of times. The first rebalancing required a sale of a portion of my FBRVX holding at $40.94 on March 21, 2005. Since then I have increased my stake twice purchasing more shares at $44.54 on August 2, 2005 and on February 17, 2006 I purchased additional shares at $45.32

Value increase from the dates of purchases of FBRVX:
January 9, 2004 to present: 69.6%
August 2, 2005 to present: 26.9%
February 17, 2006 to present: 24.7%

Compared to the increase in the S&P 500:
January 9, 2004 to present: 33.0%
August 2, 2005 to present: 21.8%
February 17, 2006 to present: 16.8%

FBRVX is a no-load, no commission purchase for me through Charles Schwab. My net returns are not as high as the increase in the Net Asset Value, but the relatively high expense ratio of 1.38% still allowed me to beat the index. This performance is not as strong as the performance of Alpine International Real Estate (EGLRX). This no-load, no-commission mutual fund has done much better than FBRVX and the S&P 500 this year-to-date. EGLRX’s return for the year is up10.24% while FBRVX is up 3.83% the S&P is up 5.14%. I couldn’t pass up this performance by EGLRX that has a total expense ratio of 1.17%. I moved a large portion of my stake in FBRVX into the smaller stake I had in EGLRX.

This wasn’t done because of rebalancing. It was done because I want my savings to grow faster. It was primarily done without utilizing my trading principles, though the year-to-date returns support my move. This was a risky decision. I feel protected from the current bumps in the major indices because of the size of the mutual funds. I will be watching the change closely so as to determine if this practice comes back to haunt me.

A number of friends are starting their IRAs and discussing investing as a means of financing their retirement. Much of that discussion has revolved around the want to purchase shares in socially conscious companies. The most accessible vehicle to achieve this goal appears to be investing into mutual funds that screen for environmentally and socially responsible companies.

I highlighted my comments and concerns in previous posts (Fidelity Investments and Lessons from the Forum) in regards to this topic. After further thought and reading I have come to a deeper understanding of socially conscious investing. Owning a share of a company can have an impact on their business practices. The level of that impact by an individual is so small as to be almost immeasurable however. That does not mean that you should abandon socially conscious investing.

I strongly suggest reading the article Why Do Companies Care About Their Stock Prices? from Investopedia. The four reasons that the article highlights makes sense to me.

• The managers of the company are shareholders: If the price of the companies stock decreases then the individual stakeholders within the company will see a decrease in their net worth. Therefore, they have a truly vested interest in the stock price increasing.
• Investors are partial owners of the company: As owners of stock in a company we have a legal right to use shareholder meetings to initiate changes in the business practices of the company. The level and amount of organization that is required to make this effective appears to make this practice unusable for an individual. However, managers of mutual funds that hold large percentages of shares in companies have a higher ability to steer the company towards better practices.
• The stock price is a measurement of a company’s financial health: A healthy company is able to obtain funds to continue or expand beneficial business practices. Sustainable business practices have a cost and a company has a stronger ability to invest in the practices if their stock price is growing.
• Weak companies can be purchased more easily: A low stock price may allow another company the opportunity to make a bid to control the business. There is no guarantees that a business will continue similar social or environmental practices if purchased by a new company.

My feeling is that we have the least amount of influence on a company’s behavior as individual investors when we purchase stocks in a company on the secondary market. This is based on our not providing funds directly to the company selling the stock. Individual investors are also hampered in their influence on the company by their limited percentage of ownership.

I do believe that companies care about their stock price for the reasons that are outlined in the article. These reasons are influenced by stock ownership and therefore we have some impact on this complex financial system. Literally, buying into a companies sustainable business practices is showing support for their decisions.

More importantly, as an investor you should feel comfortable with your purchases and for that reason alone, purchasing stocks and mutual funds utilizing socially conscious investing practices is a good idea. My conclusion is that investing in the stock market is not the primary vehicle to promote sustainable development. Investing with an environmental and social purpose demonstrates support for this ideal, however. The greatest impact we can have on society is in our direct action, not stock purchases on a secondary market. I believe that my purchasing Greenpower and highlighting KIVA are more important steps towards sustainability.

Fidelity Investments is a highly rated, online investment company. I manage my Roth IRA through Charles Schwab, but my partner Susan has started her account with Fidelity. I have logged on to Fidelity a few times to help her screen for socially responsible mutual funds. Unfortunately Fidelity lacks a specific screening mechanism to find such funds. I resorted to culling through the list of mutual funds listed at Social Investment Forum to compare mutual funds. I found that a wide variety of Calvert funds were available to purchase. The Large Capital Value Neuberger Berman Socially Responsible Fund was also available. These mutual funds were a few the funds that met Susan's investment rules. However, I have stumbled across a tough issue while looking at another family of funds that Susan was interested in, MMA Praxis Mutual Fund's company holdings. ConocoPhillips is a worldwide energy company and is listed as a company held by MMA Praxis. Susan does not want to invest in "oil companies", but MMA reports that they only invest in companies with proactive environmental practices.
In making investment decisions, MMA strives to invest in companies that:

The natural environment is a finite resource, the inheritance of future generations and a gift from God. We expect companies to respect the limits of our natural resources and to work toward environmental sustainability. Companies should “reduce, reuse, and recycle,” pursue cleaner and more efficient production methods and bear a deep concern for the welfare of animals, minimizing animal testing, wherever possible. We value a company’s involvement in the environmental technology and services arena. We expect companies to engage in honest, transparent environmental reporting, to support respected environmental principles and to publicly promote the value of the environment.

This is a stumbling block in finding an investing practice for her. By utilizing the mutual fund list provided by Social Investment Forum, I was able to establish criteria that appeared to offer Susan a small universe of mutual funds in which to invest. However, now that I found that one of these mutual funds holds a type of company that Susan doesn't want to invest in, I am at a loss as where to look for acceptable investment options. If I found a mutual fund that wasn't holding an "oil company" currently, their screening process may allow a purchase of that type of company at a later time. It appears that Susan's principles are too narrow to allow for investment in socially conscious mutual funds based on the amount of time it would take to do continuous research in the funds holdings. We will have to go back to the drawing board and define a new screening procedure. Another option is to get out of shopping for mutual funds, but I haven't discussed that possibility at all with her.

Charles Schwab is a full-service, online investment company. I find the breadth and complexity of tools available to me as an account holder to be very good. Through their Advanced Mutual Fund Screener, I was able to select Socially Conscious from their Special Criteria menu. This broad search resulted in a list of 53 funds. I would categorize this as a large number of funds to choose from at Charles Schwab. I wasn't able to find any information online that indicated how a fund was defined as being socially conscious. A quick review of the names of the funds provided a good indication of the intentions of individual mutual funds, but a name is just that. Interestingly I found that their were two funds with titles related to religious affiliation, AVEMX Ave Maria Catholic Values and IMANX Dow Jones Islamic Index K. Mennonite Mutual Aid had several different socially conscious mutual funds. I will discuss this family of funds after further review of the list.

Of the 53 funds considered socially conscious, one, PTSAX, was listed as being a 5-star rated fund by Morningstar , eleven funds were rated 4-star, and 11 rated 3-star. Morningstar ratings are important to me for the simple reason that they have done their homework and have provided a scale by which I can judge a mutual fund. The more stars, five being the highest, the better the fund is managing performance, risk and a host of other factors. This rating scale has not always been robust, but that changed in 2004 and consumers of their information have benefited. Morningstar is a company of experts that research investment options (stocks, mutual funds, ETF, etc.) and make judgements about them. The rating system is a tool that makes a judgement about how well a stock or mutual has done to date. Charles Schwab most likely pays for a subscription from Morningstar so that I can get information about my investment choices within the Schwab web site.

Along with providing the Morningstar rating for mutual funds and stocks, Charles Schwab provides it's own mutual fund rating. Mutual Funds can be considered to be on Charles Schwab's Select List based on their own proprietary research that parallels Morningstar's. Only one socially conscious fund, PAXWX, made the Select List. My experience has been that mutual funds from the Select List can perform very well, especially when coupled with a 4- or 5-star rating from Morningstar. Rob has stated that he is not as concerned with performance of the mutual fund (in comparison to non-S.C.I. funds) due to how early he has started his investing. He feels that over the life of having his Roth, that a socially conscious fund can meet his retirement needs along with his political, environmental and social ideals.

My partner, Susan, has recently started her Roth IRA and shares similar goals. The other day she and I defined her socially conscious screening criteria so that we could find mutual funds to compare. I utilized a list of socially conscious mutual funds compiled by Social Investment Forum. Susan and I went through the different types of Screening and Advocacy categories that funds use to make their decisions about the companies they invest in and narrowed Susan's choices. She found that the screening and advocacy used by Calvert funds in investment criteria, with the exception of alcohol, best defined her ideals. Susan won't mind if the company that her mutual fund invests in is somehow related to alcohol as long as the rest of the criteria are met. I culled through the list of funds that Social Investment Forum provided and found six fund families that had mutual funds the matched Susan's criteria. By definition Calvert was one family and that was followed by Mennonite Mutual Aid, Neuberger Berman, Parnassus, and Walden Asset Management. Susan has her Roth IRA with Fidelity Investments and I have not reviewed her options with them yet. I found that Calvert funds are unavailable to new investors through Charles Schwab. However, the rest of the funds that match Susan's criteria are available through Schwab.

I looked at five mutual funds from these families: MVIAX, NBRSX, PARNX, PARSX, WSFEX. None are on Schwab's Select List. The Morningstar rankings are:

• MVIAX 2-star
• NBRSX 4-star
• PARNX 2-star
• PARSX no rating
• WSFEX 2-star

There are more than five mutual funds from all of these fund families and I chose the funds above based on the title of the funds.

The good news from my review is that Charles Schwab has socially conscious funds to research and compare. There are also a handful of highly ranked funds. The challenge in my opinion is finding a funds that are performing relatively well and allow for diversification within a Roth portfolio. Diversification within a portfolio is essentially the practice of holding mutual funds and stocks that are significantly different from each other. Their difference can be based on being from different industries and that the companies that are held in the portfolio have different capitalizations. Capitalization can simply be referred to how much it would cost a to buy all of the stocks of a company. It is best to have a mix of large, medium and small capital companies in your portfolio. Most mutual funds will target one type of capitalization, though there are funds that mix capitalizations, called blended funds, in their investments in order to diversify for you. Blended funds can be useful, but a Roth IRA with similar blends is not truly diversified unless each fund is significantly different. A portfolio that is diversified is at less risk to decrease in value based on significant changes within sectors of the the financial markets.

Interesting article about the Gates foundation and the recent investigation into their investment strategies... http://www.socialfunds.com/news/article.cgi/2225.html