NCPA - National Center for Policy Analysis


May 11, 2009

Socially responsible investing (SRI) is the practice of choosing stocks, bonds or mutual funds based on political, religious or social values.  This investment strategy can be hazardous to an individual's portfolio, and if followed by state and local employee pension funds can adversely affect thousands of people's retirement incomes, say Allison Hughey, a research assistant, and Pamela Villarreal, a senior policy analyst, both with the National Center for Policy Analysis.

SRI funds account for a relatively small portion of total investment.  However, they have grown rapidly in recent years due to shifting public perceptions of corporate social responsibility. According to the trade association Social Investment Forum:

  • Of $25.1 trillion in U.S. equities, an estimated $2.71 trillion is invested by individuals or mutual funds using one or more of the three core socially responsible investing strategies.
  • The number of socially-screened mutual funds has grown from 55 in 1995 to 260 in 2007.
  • Socially-screened mutual funds have $208.1 billion in assets.

SRIs also generally have lower rates of return due to their investment makeup.  According to Consumer Reports, from 2003 to 2008:

  • SRI funds returned 11.1 percent annually while all domestic equity funds (stocks) returned an average of 14.5 percent.
  • Only 15 percent of SRI funds with five-year track records returned over 11.1 percent.
  • Moreover, SRI funds usually have higher fees and expenses than typical mutual funds.

Take the five-year average return of four typical investments that are usually screened out by SRI funds, compared to four of the largest socially responsible mutual funds:

  • Over a five-year period, the four regular funds outperformed the four SRI funds.
  • The Amex Oil index topped the charts with a five-year return of 7.46 percent, and the worst performing fund was the Vanguard Calvert Social Index Fund at -9.15 percent.
  • Amana, with a return of 5.30 percent, was the only SRI fund whose performance approached those of the regular funds.
  • Even the worst performing regular fund, the S&P 500 Index, did better than three of the SRI funds.

Source: Allison Hughey and Pamela Villarreal, "Socially Responsible Investing," National Center for Policy Analysis, Brief Analysis No. 657, May 11, 2009.

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