Choosing stocks is all in the mind

Planners and investment advisers are supposed to care about their clients' goals.

So how come so many of them mouth off when someone asks about socially responsible investments (SRI)? They rant that SRI portfolios can't earn as much as standard, diversified fare. If you want to do good, they say, invest in winning stocks and write the charity a check.

These advisers have a couple of wrong-headed ideas. They are mistaken (or bull-headed) about SRI-managed money, which can earn competitive, long-term returns.

The more important question is why the scoffers are making personal judgments about which of their clients' goals are worth attending to.

When you visit an adviser, you are asked about your needs, temperament and aims. Are you aggressive or conservative? Do you want current income? What are you saving and investing for?

To that third question - what for? - ordinary advisers have been trained to hear only a limited number of answers: a second home, college, a retirement kitty, a large bequest for heirs. They haven't opened their minds to the social or religious goals that occupy a growing number of investors today.

We all bring more than pure monetary values to our money choices, says Meir Statman, a professor of finance at Santa Clara University in California. Products carry expressive characteristics as well as useful ones. They tell our neighbours about our values, tastes, wealth and social class. A Chevy Impala will get you across town. So will a Toyota Prius, a Porsche and a Hummer. Whichever one you drive, you are hanging a flashing neon sign on your soul. It's that way with SRI investing, too.

Best interest

Brokers and planners are supposed to choose investments that are suitable for their clients, and in their best interest. "Suitable" includes values, too. If your adviser won't listen or knows little about SRI, take your business to someone who shares your ideas.

The standard objection to SRI is that, inevitably, it will yield reduced returns. Advisers who work within a limited universe won't be picking all the best stocks.

Leave aside the question of whether any adviser can be relied upon to select the best stocks. Years of research show that no harm attaches to a socially conscious tilt. Sometimes, SRI mutual funds run ahead of traditional ones, such as in the 1990s when the white hats stocked up on consumer durables and technology shares. At other times, SRI runs behind, as has been true in recent years when the social funds steered clear of the soaring oil, metals and industrial stocks.

The managers who put together SRI portfolios start with specific investment screens. Typically, they reject some industries wholesale, such as tobacco, liquor, gambling and weapons suppliers, as well as companies with poor records on human rights and employee relations. They apply traditional securities analysis to the stocks remaining on the list.

From this, it might appear that SRI funds aren't sufficiently diversified. But when you think about it, neither are conventional funds that tilt away from the broad market indexes for one reason or another. They, too, make bets on favoured industries or countries.

Classic metrics

Over a market cycle, SRI and conventional funds perform about the same, Statman says. With either type, your returns depend primarily on the classic metrics, such as investment style, sector allocations and the amount of money invested abroad.

Some of the newer SRI mutual funds diversify across all industries, even traditional baddies such as metals and weapons. In those black-hat sectors, the managers look for the best-of class - meaning, for example, companies actively cleaning up pollution problems (as opposed to ones ignoring the stink).

For those who sneer at the choices of the social and religious funds, I offer an anti-SRI: the red-hot Vice Fund, founded in Aug-ust 2002, near the start of the latest bull market and currently managing $177 million in assets. Vice doesn't make nice and doesn't diversify. It revels in global gambling, tobacco, liquor and defence.

Deep in our SRI hearts, we knew that would happen, didn't we? Conscience is comforting, but in the real world, sin wins.