Socially Responsible Investing: Vice Trumps Virtue On Wall Street
By Mark Skousen, Chairman, Investment U
Monday, November 7, 2005: Issue #484
Thus every Part was full of Vice,
Yet the whole Mass a Paradise.
- Bernard Mandeville, The Fable of the Bees (1714)
Socially Responsible Investing is all the rage these days. By some estimates, more than $2 trillion, or 12% of professional management assets, target socially responsible companies. Shareholders have invested more than $150 billion in socially oriented mutual funds.
By definition, these are funds, or managed accounts, that avoid investing in “sin” stocks, such as tobacco, alcohol, gambling or defense (war) companies. They are proactive in supporting companies favoring environmental- or labor-friendly relations.
Take the Sierra Club Stock Fund (SCFSX), for example. It severely limits its stock selection to companies that meet certain “environmental and social criteria” and won’t invest in:
- oil companies
- coal companies
- nuclear power companies
- or firms that make tobacco or weapons
Another example of a socially responsible investment is the Timothy Plan Large/Mid-Cap Growth Fund (TLGAX), part of America’s first pro-life, pro-family, biblically-based mutual fund group. The web site states, “If you are concerned with the moral issues (abortion, pornography, anti-family entertainment, non-married lifestyles, alcohol, tobacco and gambling) that are destroying children and families, you have come to the right place.”
Social advocates argue that it’s a “myth” that you have to sacrifice return in order to invest according to your moral values.
Is this true? Can social funds perform well, and perhaps even outperform the stock market?
I decided to put this issue to the test, and today, we’ll find out what kind of returns one can expect to get with socially responsible funds.
Socially Responsible “Value” Investing May Not Be a Bargain
The following chart compares two socially responsible investing funds over the past two years: the Sierra Fund and the Timothy Fund. Note that this is a period which has experienced both bull and bear markets. Let’s see which social fund fared better, compared to the S&P 500 Index.
The results from the chart above show that the Timothy Fund (black) under-performed the market, while the Sierra Club Stock Fund (blue) slightly outperformed the overall market index. According to Morningstar, the Timothy Fund rates two stars (out of five), while the Sierra Fund rates four stars. (In case you think I’ve cherry-picked these socially responsible funds, you might compare the returns of other such funds – I found no social funds that clearly and consistently beat the market over time.)
The Next Question: How Well Do the Social Funds Perform Compared to “Sin” Stocks?
Fortunately, we can answer this question today. Since August 2003, the Vice Fund (VICEX) has focused exclusively on investing in tobacco, alcohol, gambling and defense stocks, all considered anathema to the socially responsible investing crowd.
Let’s compare the performance of the Sierra Club Stock Fund (black) and the Vice Fund (blue) over the past two years in the following chart:
Here the results are quite startling. The sinful Vice Fund clearly outperforms the virtuous Sierra Club Fund!
Conclusions on Socially Responsible Investing Funds: a Paradox and a Warning
This conclusion reminds me of the scandalous work, The Fable of the Bees, written in 1714 by Bernard Mandeville, a Dutch psychiatrist and pamphleteer. He tells the story of a community, thriving “grumbling hive,” that turns “honest” and abandons its wicked ways, spendthrift habits and wars against its neighbors. As result, the group is swiftly reduced to poverty and destruction after converting to a moral community.
Mandeville’s infamous paradox leads to the ironic conclusion that private vice leads to public virtue, “and that the moment evil ceases, the society must be spoiled.”
In 2005, Mandeville is proven right again!
The lesson for investors is not as controversial: If you wish to maximize your profits, don’t limit your investment choices. If you choose to make value judgments on which stocks you are going to invest in (in today’s example, “socially responsible investing” funds), you are probably going to hurt your return.
Good trading, AEIOU,
Mark
Today’s Investment U Crib Sheet
- For more on Bernard Mandeville and The Fable of the Bees, see my book, The Making of Modern Economics: The Ideas of the Great Economic Thinkers.
- Investing in Sin Stocks: How to Oppose Radical Islam in Your Portfolio
- Eckhart Tolle: Old Ideas From a New Earth Guru
- Sin Stocks: 2 Profitable Vice Investments Soaring Despite the Recession
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