What to Learn Before You Invest
Ways that church leaders can research the backgrounds of funds and stocks
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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.

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October 1, 2010

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