This morning I was interviewed by SmartMoney magazine on Socially Responsible Mutual Funds (the magazine name must remain confidential for the time being at their request) the following are the major points of the interview:
1. Why are there so few Value oriented mutual funds within the SRI industry? Despite the tendency for the mutual fund industry as a whole to come forth with products that reflect recent success, there has been little or no movement towards Value oriented funds despite their relative success over the past 10 years.
2. Why are most Socially Responsible Mutual Funds composed of with similar holdings? The KLD screening universe follows approximately 500 companies with a high percentage included in the S&P 500 Index. 500 is not that many considering there are over 5000 equities to choose from. Medium, Small and Micro caps get virtually no coverage outside of private portfolio managers.
3. In years past SRI funds made an attempt to avoid the worst offenders to their screening policy. However this was frequently not the case as highlighted by investigative reports by Businessweek Magazine and recent SEC enforcements. BP was owned by many of the larger SRI funds dating back over a decade as it was consider the “best of the lot”. Many firms, including RMHI do not participate in shareholder advocacy to create change since it can create a conflict of interest should the stock disappoint and considered for sale.
In recent years there has been a shift to owning significant offenders with the hope of creating change from within. Is it too cynical to wonder if the efforts to create change are sincere, since the odds are very low for success?
In addition, many “Green” funds including Alternative Energy Exchange Traded Funds own shares of mining companies. Does extractive industries like mining contradict the purpose of Green Investing?
4. Most importantly, have Socially Responsible Funds prepared for the potential of another Lost Decade for stocks? Our thesis is that should our coming decade be as fruitless as the last have SRI funds implemented strategies that worked despite the low return of the S&P 500? In other words, Value over Growth?
Brad Pappas
No positions