EVOLUTION OF SRI
While the growing focus on guns is new, the broader category of socially responsible investing has grown steadily in recent years, reaching $3.74 trillion at the end of November — a bit more than 10% of the American investment marketplace, according to the Social Investment Forum, a trade organization that publishes data on the sector. SRI assets grew by 22% from 2010 to 2012, the group reports.
The industry has moved beyond simple indexes of companies that exclude alcohol, tobacco and defense stocks; new instruments now cover a multitude of asset classes and geographic areas. There are also exchange-traded SRI offerings, bringing the world of low-cost, transparent trading into the mix. Advisors say it’s now possible to build a well-diversified portfolio of just SRI funds.
Eliminating guns doesn’t sacrifice much return for clients, advisors note. “I can make more money buying other companies, so I just don’t care if I don’t own gun makers,” says Greg Bitz, founder of Metropolitan Financial Group in Chevy Chase, Md., who invests along socially conscious lines. “It’s not like we’re eliminating Apple. I know Apple is going to outperform a gun maker.”
Until their recent slump, Apple shares did indeed outperform the gun makers over three- and five-year periods. But the firearms companies have held their own. Shares in Smith & Wesson are up 73% over the 12-month period ended Jan. 30, and the others are not far behind.
When asked to carry out a client’s wishes to divest of a sector, some advisors believe it’s their duty to comply. “I am here to guide them and help them achieve what they want to achieve,” Safran says. “If part of their financial objective is to create a better world for their future, and they feel like they can accomplish a better world through how they invest, then I’m on board.”
James McDonald, president and chief investment officer of Index Strategy Advisors in Houston, has gone a step further. He was so shaken by the Newtown shootings that he expressed his heartache in a blog post on his firm’s website, talking about the relief he felt the night of the mass murder when he saw his own 6-year-old son come home. McDonald also wrote about the amount of firearms stocks that index funds own. “I’ll be watching the choices of fund companies closely, and to the fullest extent possible, direct my [clients’] portfolios to those investments that minimize or, if possible, eliminate weapon makers from investment consideration,” he wrote.
McDonald says the blog post generated quite a bit of interest among his clients — with some expressing wholehearted support and others vehement disagreement.
Soon after, McDonald took additional steps. He set up a new investment vehicle for his clients, based on the MSCI environmental, social and governance-related indexes, which excludes weapons makers. About a dozen clients have asked for this investment option, although McDonald hasn’t yet made the investment, wary of committing new money at what could be market highs.
“I’m not sure if this will make a difference,” McDonald says about the impact of excluding guns. “Fortunately for my clients, these indexes have outperformed.” FP
Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger’s.