Are Moral Mutual Funds Really Possible? Financial Advisors' Daily Digest

Includes: FB, WFC
by: SA For FAs

Maks F.S. stacks up socially responsible and faith-based investing funds.

Ron DeLegge critiques a $796,000 retirement portfolio.

John M. Mason sees the value of the dollar headed lower in light of rising debt and deficits.

Maks F.S. performs yeoman’s work in sorting out the ever-expanding field of socially responsible and faith-based investing funds – both in terms of their various objectives and then in terms of their actual performance. As a professional advisor, he says the question comes up often, as he writes in his opening line:

"Being an advisor in New Jersey, I have often run into clients and prospects interested in investing in line with their moral or religious beliefs.”

Read the article for his thorough assessment. For my part, please allow me to think out loud a bit as to why I feel skeptical about this particular area of the investment industry. As someone with strong convictions in many areas, in theory, I too would welcome the opportunity to invest accordingly. But my moral views are highly specific and thought through, and I find it unlikely that some investment team of MBAs share these values precisely or know how to select moral companies in a manner congruent with their need to package a commercially viable fund.

And, even if that were possible, I question said portfolio managers’ ability to get the real story from the public companies under consideration. If your only concern is that you don’t want cigarettes or guns in your portfolio, then I suppose that Wall Street can put that together for you. But what if, say, you wanted to omit companies whose executives cheat their customers or window-dress their shareholder reports – regardless of the industry in which the company is found? Lying, cheating and stealing are, from the thief’s perspective, preferably done secretly, and there are many ways to do it. Fooling a portfolio manager is the least of such an executive’s problems.

And if that company is caught lying and cheating, probably the second thing it will do (after steeply discounting its product or service) while in crisis management mode is cut some generous checks to whatever causes are deemed worthy of getting on the potential buy-list of the socially responsible investment managers out there. After a few years of winning back the customer and buying off interest groups, the socially responsible funds may now be loading up on shares of this new paragon of virtue, though its rotten corporate culture may not have fundamentally changed.

It was not so long ago that Wells Fargo (NYSE:WFC) was in the news for pressuring customers to open up accounts they neither needed nor wanted. The firm stands to be fined for a new crop of auto and mortgage lending abuses that are more under the radar in terms of news coverage. Yet, from its website, one can readily see the firm is in overdrive demonstrating its moral virtue vis-à-vis a grab bag of fashionable causes. So is it St. Wells, respecter of indigenous peoples, or WFB, looter of unsuspecting mortgage applicants? How long would it take you sort through this split personality, given the amount of publicly available data you’d have to access and private, possibly hidden data you would need to properly evaluate this? How long would it take your portfolio manager with hundreds if not thousands of companies to evaluate? And does your portfolio manager have a doctorate in theology or appropriate ordination to match his MBA?

But beyond all the difficulty of investigating the moral character of these firms, and beyond the fact that most underperform non-socially responsible funds (see Maks F.S.’s article), a more basic question can be asked: How much does all this really matter?

Morality matters, but in the most general terms, business is a moral activity because businesses cannot succeed without pleasing their customers, which is a righteous thing to do. As to the bad apples out there, what is your culpability for owning their shares? You did not know about the bad things they were doing and you do not condone them. When the Wells scandal occurred, one did not see any shareholders waving banners bucking up the firm. Nor was the average shareholder in a position to wage an effective protest. You may have profited from the wrongdoing, although completely unknowingly; and had you sold your shares, someone else would have bought them, so your power to influence corporate behavior was all but nonexistent.

Institutional investors do have the potential to enable corporate misconduct, but here we’re talking about individual investors without such clout. In a few minutes, Facebook’s (NASDAQ:FB) CEO will be testifying before Congress; investors who conclude that Facebook engaged in unethical conduct would be justified in selling their individual stock. But here we’re talking about funds, which own many individual securities, which is why I asked, above, “how much does all this really matter?” rather than “does this really matter?” If you own a fund with 100 stocks, or as is particularly popular these days, 500 stocks, than the immoral behavior of misbehaving companies will likely constitute a very small share of a collective entity that, as stipulated above, is primarily engaged in the kindly provision of goods and services to society.

For all the above reasons, it seems more sensible to judge your investments on the basis of investment criteria, throwing out a rotten apple if and as appropriate – based on your individual values and not those of a portfolio manager working off some vague checklist.

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