Are Socially Responsible Investing (SRI) Funds Better Investments?

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Are Socially Responsible Investing Funds Better Investments?

What do you think of the idea of Socially Responsible Investing (SRI) implemented simply by investing in something like the Domini Social Equity Fund (DSEFX)?

– Wanting to do good while doing well.

In “Stock Ownership Is a Bad Strategy for Social Change” we wrote:

SRI funds usually have higher than normal expense ratios to pay for the extra effort of ranking the companies. This puts a drain on their return, often making them a worse investment than comparable non-SRI mutual funds. With questionable results and worse returns, SRI is a nice dream but a bad investment philosophy.

The Domini Social Equity Fund (DSEFX) is a large cap US stock fund. It is very similar in composition to iShares Core S&P 500 ETF (IVV) or Vanguard 500 Index Fund Investor Shares (VFINX) and it is fair to judge their investment returns against similar S&P 500 funds.

DSEFX has an expense ration of 1.20%. This is higher than normal – compare it to IVV’s 0.07% and VFINX’s 0.17%. Normally paying an extra percent would only be justified if returns are a percent higher on average.

As of the end of 2014, DSEFX has a ten year annualized return of 6.60% versus the S&P 500’s 7.67%. Meanwhile, IVV (7.62%) and VFINX (7.55%) both did much better.

Losing one percent compounded over a decade is a significant loss. Interestingly, the under-performance of DSEFX almost exactly equals its excess expense ratio, showing there is little added value for its expense.

DSEFX tries to make up some of its higher expenses by investing more aggressively than the S&P 500. It is currently invests 23.0% in Information Technology compared to only 19.5% for the S&P 500. The fact that DSEFX has a higher beta and is investing more aggressively might be evidence that socially responsible investing might under-perform the S&P 500 even after factoring in the higher expense ratio.

By way of comparison, there is a mutual fund which invests almost exclusively in the type of companies that SRI funds exclude. It used to be called The Vice Fund (VICEX), now called the  Barrier Fund. As they write on their website:

The Barrier Fund primarily invests in the following industries: Aerospace/Defense, Gaming, Tobacco and Alcoholic Beverages.

VICEX has a ten year return through the same time period of 7.94%, beating even the S&P 500 Index itself. And that return is after charging a whopping 1.47% expense ratio. This fund is one case where the wages of sin might be pretty good. As the fund explains:

The Fund seeks to select well-performing stocks of tobacco, alcohol, gaming, and weapons/defense companies because we believe that these industries tend to thrive regardless of the economy as a whole. In fact, they may have the potential to perform better when times are uncertain, leading many to view investment in industries with significant barriers to entry as a solid strategy during recessionary periods.

Changing the world for the better is not as simple as which stocks you purchase. And using SRI filters doesn’t produce the best returns.

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)