Value and Values?
Wouldn't it be great to add not only value, but VALUES to your investment? Socially responsible investing has been increasing in popularity but has not completely proven itself able to outperform passively managed index funds. However, in principal the idea is good because it will eliminate risk by screening companies on their social responsibility and in theory will reduce investment risks.
The FTSE 4Good Index (pronounced "footsie") is an index which screens companies for socially responsible practices. Like Calvert, Parnassus, and Domini, they have various criteria on defining what "socially responsible" and this will naturally determine which companies will be included in the index. FTSE 4Good is unique in that it creates "challenging yet achievable" standards. But FTSE don't stop there. They constantly increase their standards and any companies that do not meet the standards will be removed from the index.
Vanguard's Socially Responsible Option
Vanguard has a great option with their FTSE Social Index Fund Investor Shares (VFTSX). Briefly, the fund seeks to track the FTSE 4Good Index, is a no load index fund (no sales or redemption fees) and has a low 0.24% expense ratio (for more information see the Fund Snapshot and Fund Prospectus). As I detailed in my blog post Socially Responsible Investing: Can it be traditional funds?, I could not justify investing in the various socially responsible funds because of the high expense ratios and fees.
Luckily, Vanguard offers a more cost effective index fund compared to other available SRI funds. Previously, Vanguard had benchmarked the Calvert Social Fund but switched for a variety of reasons (See Social Fund's article). Vanguard's low cost SRI fund intrigued me and deserved further investigation as an investment option.
FTSE 4Good Overview
For an overview, take a look at the FTSE 4Good Index Brochure and the Inclusion Criteria Brochure. Below I've listed the types of companies that they exclude, and then the factors the fund uses to determine what remaining companies will be included in the fund.
Exclusions
- Tobacco Producers
- Companies manufacturing either whole, strategic parts, or platforms for nuclear weapons systems
- Companies manufacturing whole weapons systems
- Owners or operators of nuclear power stations
- Companies involved in the extraction or processing of uranium
- Working towards environmental sustainability (Climate Change)
- Developing positive relationships with stakeholders
- Up-holding and supporting universal human rights
- Ensuring good supply chain labor standards
- Countering bribery
What holdings does the index have?
After the exclusions and the rigorous screens and filters that the FTSE has performed there are a few funds that remain. Their holdings can be found here.
I was surprised to see Rio Tinto included. They are a mineral/mining company that has not had the best reputation in the past. Also, it interested me that no oil/petroleum companies are present. Given the circumstances of peak oil and how well these companies are performing, I feel like it is not wise to exclude these companies.
This is where socially responsible investing can get extremely difficult, because there are a set of criteria and if a company doesn't meet them, they are not included. Although I want to believe that there are rational people determining the criteria that these companies should have, it worries me that emotions might get in the way of investing. I personally would never bet against any energy companies, in particular petroleum because they are so integral to our society and will only make more once peak oil hits.
My Thoughts
This index is relatively new and there isn't much performance history. However, I have to say that they have an extensive and rigorous set of criteria to select socially responsible funds. I want to believe that these screens will provide the investor with a superior profile but I am reluctant to do so because it eliminates a significant amount of the market. Burton Malkiel's book "A Random Walk Down Wall Street" and the book "The Bogleheads' Guide to Investing" give very strong evidence that it is extremely difficult to beat the market. Many active fund managers choose to instead track the market with low cost index funds for their own portfolios.
I think that once I get a larger amount of assets, I will look towards adding socially responsible investing as a small portion of it. Before that though, my investments will go primarily into the Target 2040 Retirement Fund which automatically diversifies your investments and will change them to more conservative investments as you approach your retirement. Target Retirement funds represents a much broader market profile and does not involve as many risks as an index fund like the FTSE 4Good Index. The Target Retirement 2040 fund is comprised of other "staple" Vanguard index funds which are seen below:
- Total Stock Market - 72.0%
- Total Bond Market - 10.1%
- European Stock - 9.9
- Pacific Stock - 4.4%
- Emerging Markets - 3.6
The second major part of my portfolio will involve California Long Term and Intermediate Term Tax Exempt funds. These funds have California Muni Bonds which are "triple tax free". This means they are not subject to Federal, State, or Local income taxes. For me that is extremely important because of my high federal and California state income tax brackets.
Once I have a substantial amount invested into the Target Retirement and Tax Exempt Muni funds, I will begin investing in the socially responsible funds. At the moment I plan to invest 10-15% of my portfolio into SRI funds. If there is strong evidence in the future that SRI funds can outperform traditional funds, I will consider investing more into SRI specific funds. However, until then, I will stick with a more traditional strategy with a 80/20 mix of stocks/bonds with some money in munis.
Related Blogs:
- Socially Responsible Investment: Can it beat traditional mutual funds?
- Microlending: Socially Responsible Investing
Recommended Books:
- Peter Camejo
Taylor Larimore
- Burton Malkiel
1 comment:
Good to see this type of article. We have been writing about socially responsible investing and investing with your values since 1992.
Check out two resources -
1) GreenMoney Journal at- www.greenmoney.com
2) Investing with Your Values book by Hal Brill, Jack Brill, and Cliff Feigenbaum
=======
Post a Comment