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What to Learn Before You Invest

Ways that church leaders can research the backgrounds of funds and stocks

Church leaders find themselves in charge of endowments, capital accounts, and, in some congregations, pension funds. They may have to make big decisions about investment policy or small ones (relatively speaking) about which funds to include in a 403(b) plan.

But how can leaders discern what companies should be avoided, based on social or moral grounds, and also know the right investment funds to purchase? Is the hot issue alcohol, or is it the treatment of workers in developing countries? Or both?

The perfect investment (like the perfect job, perfect boyfriend, and perfect political candidate) doesn't exist, so church leaders need to set priorities for the most important issues for the funds they manage. They need to put these priorities into the context of risk, return, and total cost when talking to the staff and church board.

It's hard to make specific recommendations for every investor who cares about social issues, because different investors care about different things. As with any discussion of investments, the primary consideration is risk and return, but return does not have to be sacrificed to accommodate moral concerns.

In the purest version of academic finance, a company's business doesn't matter, only its risk and return characteristics in the stock market. Although this notion seems insane to the real world, it actually has some applications for effective social investing. A fund that simply excludes offensive companies will miss out on performance if it doesn't replace them with stocks that have some similar risk and return characteristics. Tobacco companies sell branded consumer products with addictive properties, but so do companies that make candy, soft drinks, and razors. That's just one example of how a portfolio can exclude objectionable companies without losing their performance contributions. Many social and moral mutual funds perform similarly to equivalent funds that invest in anything because of the fund managers. You do not have to accept poor relative performance in a social fund. (Despite the fervent wishes of so many social investors, though, you should not expect better performance.)

If a congregation wants to include different social and moral criteria in its investing, the first step is to define what, exactly, is meant by that. In some denominations, there will be strict doctrinal guidelines to start with. In others, it will be fuzzy. Nondenominational churches will need to reference their own doctrinal beliefs to develop direction. Some churches view gambling as a sin, for example, while others raise money through bingo. If the doctrinal guidelines aren't clear, then the people making the decision about the investments need to make sure that they are clear. That means establishing real guidelines on which businesses and practices to exclude—or include—not some vague sense of which companies are good and which are bad.

There's a great guide to different mutual funds with different SRI guidelines, http://www.ussif.org/sribasics, put out by the Social Investment Forum, a trade group for companies in the social investment business. It has great information on the screening practices of their member funds that may give you some ideas about how to set your own policies or find mutual funds to use for your money. There are other ethical and social funds out there, of course, but it's a good starting point.

From there, you need to look at the fund's performance. There are a few great (and free) resources that can help. One is Morningstar (http://morningstar.com), which is in the business of evaluating mutual funds. It looks at different social and religious funds relative to their investment objective (that is, growth, growth and income, bond, and so on) rather than relative to other funds with similar investment restrictions. That way, you can evaluate how the fund performs as an investment rather than as a social or moral statement.

Another is Yahoo! Finance (http://finance.yahoo.com/). It gives performance information on different funds, and you can easily compare a fund to the performance of stock market indexes, government bond returns, and other mutual funds. Obviously, almost every stock mutual fund has had terrible performance in recent years, but that's because the market has had terrible performance. If a fund is doing significantly worse, you probably want to find something else.

Although many funds are marketed at specific religious groups, don't assume that the fund for your denomination is a good one or that it is the only appropriate one. The MMA-Praxis Funds (http://mmapraxis.com/) target Mennonites, for example, but they aren't the only group of people who eschew companies in the alcohol, defense, gambling, or tobacco industries. Likewise, many religious investors like the Amana Mutual Funds (http://amanafunds.com/), which are managed to meet Islamic finance principles. The fund managers avoid alcohol, tobacco, and gambling companies, which many Christians also like to avoid; they also avoid pork producers and banks.

On the other hand, I have seen a few funds that are marketed along denominational lines that strike me as strict window dressing, going for people's hearts—and commission dollars—rather than their heads and their fiduciary responsibilities. These funds sometimes have high fees, too, which make me question the real motivations of the people who offer them. In a way, I'd argue that it's more sinful to take advantage of people's hopes than to invest in MillerCoors. (If you see a social fund that seems to have a perfect investment policy but also has terrible performance relative to the market, then you've found one of these.)

It's also important to recognize the limits of any investment policy. It might make you feel better, but changes will be slow and incremental. MillerCoors isn't going to get out of the brewing business just because some churches won't invest in the company. Shareholder activism and boycotts have led companies to change some of their employee relations or environmental practices. No matter what investment policy you pursue, your congregation should vote the proxies for companies' annual elections, which often include proposals on social issues. (In fact, researching proposals could be a good project for a young adult group.)

Social responsibility doesn't have to mean poor performance, but it sometimes does because investors put their hearts before their heads. Stock traders like to say that the stock doesn't know you own it, and I think that's good advice for social investors of all stripes. Just because you like a company and want it to do well because of some moral or social characteristic doesn't mean that it will.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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Posted:
  • October 1, 2010

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