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Okay, here I go again, even if it's as the devil's advocate.

Being a "sort of" socially responsible investor, just as long as it doesn't really cost you anything, is pretty disengenuous, isn't it? It's kind of like claiming to be "sort of" pregnant. You either are, or you aren't. Period. Similarly, how can you be "agnostic" about investing? What does THAT mean? Does it mean you don't really know, or can never really know, if investing is ultimately a worthwhile practice to pursue? Or does it mean you just don't believe in the concept of socially-responsible investing at all?

I'm not personally a socially-responsible investor (some would claim I'm not a socially-responsible anything), but I used to have some clients whose portfolios and bond funds were strictly restricted to that practice. (In fact, the bond funds were specifically founded upon that very practice).

I find it very educational to learn that the restrictions imposed by excluding entire sectors of "sin" industries do not create additional costs of any kind to those investors. I'm not convinced that's completely correct.

Although I don't personally smoke cigarettes any longer (thank God!), one of the very best long-term growth stocks I have ever owned (for many years) in my life is Philip Morris. And until Vioxx started killing off a few thousand heart patients, the pharmaceutical company Merck was an absolutely fabulous cash cow for decades, even though they regularly churned out birth control pills (including the "morning-after" pill) which intentionally interfered with human fertilization by encouraging spontaneous abortion within a woman's fetus.

Since the profit returns of these companies (and many others, for example) were not included as a part of the performance measurements of any socially-responsible investors, how absolutely certain can you really be that your performance was in no way negatively impacted by the exclusion of these companies? Specifically, how do you factor in the opportunity cost of NOT owning them?

If it's a profitable company, occupying a leadership position in a high growth industry, how do you quantify the economic disadvantage of producing missle defense systems, or diet coke, or the great majority of popularity and wealth of the entire cities of Las Vegas, Lake Tahoe, Reno, or Atlantic City, along with the principal funding for those same cities' (and many others) of their public educational institutions, with taxes generally derived from gambling proceeds? At that latter point, the principles behind socially-responsible investing seem to blur at bit, don't they?

By the way, ignoring the fact that many of my questions and comments (above) were intentionally posed from the point of view of a devil's advocate, I most certainly applaud your interest in exploring, and willingness to openly discuss, the principles and values of socially-responsible (or morally ethical) behavior, within the business community in general, and the world of finance in particular. Thank you! (Not all that appears green is necessarily environmentally-friendly). This SHOULD be both a fun and enlightening subject for discussion.

I believe some things are bad and am comfortable with things that others find objectionable. Am I still a social investor?

Agnostic as in not being sure whether social investing is good thing or not. Not having a conviction in either direction. Okay with it as long as it doesn't affect returns.

I didn't say social investing doesn't create costs. I said it is possible to out perform a benchmark without including securities that might be included in social restrictions. I cited two examples where this had occurred over long periods of time.

There is disagreement over whether the cost to society in disolution of families, medical costs, lost productivity, etc. from alcohol, tobacco and gambling out weigh the revenue they produce. Would you rather have the income you have earned on Philip Morris or the 10 to 20 years of life smoking may have cost you personally?

For the sake of argument, as long as you are comfortable with your investments, do so legally, and do not intentionally bring harm to others, then you pass my sniff test as a socially-responsible investor, regardless of whether or not you invest in alcohol, tobacco, or gambling.

I will grant you that these products all have the potential to be used irresponsibly, but they are not necessarily at the fundamental core of irresponsible behavior, and are not necessarily used irresponsibly by those of us who do not actively practice more socially-responsibile behavior, including the restrictions imposed upon such behavior.

There is no place in my investment analysis of performance numbers for the negative influence of irresponsible behavior. Likewise, there is no place for my making a value judgment about what is socially-responsible, either. That may come as somewhat of a surprise or disappointment to you, but economic decisions frequently conflict with moral principles in business judgments these days. And that's the whole problem!

By your definition, an agnostic social investor doesn't really care which way the train is going; he's just happy to be aboard. As long as social investing doesn't negatively impact returns, it's very easy to practice. It only becomes difficult (and an important consideration to those who would adhere to its practice) when ethical beliefs clash with economic valuations.

You're absolutely right about not stating that socially-responsible investing is cost-free. I don't know where I got that idea, but it certainly wasn't from you. I apologize for misreading your statement and shooting off my mouth, before engaging my what's left of my brain.

However, would you be willing to concede it's possible your benchmark could have been outperformed by an even more significantly meaningful margin, if securities were included in your portfolio which would typically be restricted from consideration by the socially-responsible investor?

You ask a good question of me (accretion vs. longevity). But given the choice, which we all have, I'd definitely rather have the money from being fully invested in MO for all those years, since I was also a smoker during the majority of that same investment period. I'm not claiming it was a smart decision, but my choice was still quite apparent, in retrospect. Besides, Larry, I believe some people can live way too long.

People or organizations who choose to limit what they invest in due to personal beliefs are what I would define as a social investor. Many things that are legal and ethical would not fit into this category. There are probably as many flavors of social investing as there are belief systems extant. Alcohol, tobacco and gambling are frequently included because so many people use them irresponsibly at great cost to the community.

If there is no place in your analysis of investment performance for the negative influence of irresponsible behavior, how can you expect analysis of the opportunity cost of social investing or the impact on tax base and other factors. You can't have it both ways. If you include the one, include the other side of the coin.

I agree completely with the statement that financial judgements frequently impinge on moral grounds. Aside from social investing it is manifest in the ethical lapses at the head of many large corporations in the recent past. It does not surprise or disappoint me, it has always been the case. The question is whether you should let moral judgements affect your financial decisions. By your own statements you have this belief. "...as long as you are comfortable with your investments, do so legally, and do not intentionally bring harm to others, then you pass my sniff test as a socially-responsible investor..." You only invest in legal transactions that do not intentionally bring harm to others.

It is hard to say whether the opportunity to invest in all the securities we exclude would have raised our outperformance or not. The principle of transfer coefficiant tells us that the more constraints a portfolio manager operates under, the less of the theoretical information ratio he is able to produce for the client. So the answer is probably yes. But my point was only that you could exclude so called sin stocks and still produce positive alpha for your client. That is not a position that is widely held. Quite the contrary, it is commonly believed that social investing results in negative performance versus a benchmark.

My question wasn't intended to emphasize the decision you made, but to ask if given what you know now if you would still make the same decision. People often avoid investing in a company or sector because they do not wish to provide support to an activity they view as having a negative impact on people or society. I chose not to invest with a loan shark not just because it is illegal, but because I know it can lead to financial ruin for those who borrow from them. Prostitution is legal in parts of Nevada but I chose not to invest in brothels because of the impact on the strength of the family. I guess if you still own Altria (the successor to Philip Morris) it answers the question.

I don't agree that the exclusion of irresponsible behavior as a factor in the analysis of investment performance is either equitable or comparable to the opportunity cost of socially-responsible investing restrictions, or to the potential impact upon a community's tax base or other economic factors of vitality.

I can quantify opportunity cost, given enough reliable empirical data, and even the potential tax ramifications, through fundamental economic analysis. But I don't know how to quantify an economic valuation of irresponsbile behavior in the same analysis (other than just zero, perhaps, which still doesn't seem right to me, since we know irresponsible behavior consistently produces nothing but a negative effect upon society). So I reject such behavior as not reliably quantifiable or possible to factor into my economic analysis.

Furthermore, that's not exactly the argument I made to you, either. What I stated was that if I rejected irresponsible behavior as a negative, then I must also reject socially-responsible actions as a positive, since neither are analyzable economic factors of quantifiable worth. That's the other side of MY coin. And I can hold both positions at the same time, because they are not incompatible or uncomparable with one another. Why shouldn't we have it both ways? I like that concept a lot!

I really try not to let moral judgments affect (impinge upon) my financial decisions. I may not always be successful doing so, but I try to make such decisions without being influenced by my personal beliefs, which are often more emotional than rational in nature, as you know. But the fact that I may actually hold such beliefs does not mean they are necessarily held and accepted by others as their beliefs too, or that I am a socially-responsible individual.

I admit I fall into the category of individuals you describe who believe social investing generally results in negative performance versus a benchmark, and you know quite well how I feel about the value of negative performance. (Remember when I survived for the first couple of rounds, before you knocked me on my ass)?

The fact that you and your colleagues have been consistently successful excluding sin stocks, and still produced positive alpha for your clients, could be fortuitous but is not altogether surprising, and is probably an example of the exception proving the rule. So that's one of the reasons your outperformance is exceptional, and unique among your competitors. The defense rests.

Not investing with a loan shark is a pretty good practice. Not investing in a brothel might be a missed economic opportunity, worthy of your careful reconsideration. (Not really; just kidding).

I quit smoking over four years ago, after having indulged that filthy habit (there, you see what I mean about the emotional influence?) for over 40 years prior. I quit smoking because I had a heart attack which nearly killed me off, and required emergency open-heart surgery. That was no fun at all. It was then in my life, when I also finally sold my old position in what was once Philip Morris, while restructuring my equity portfolio into a larger cash position, in case my family needed funds to have me cremated.

It was STILL a great long-term growth investment, but by that time, there was ample evidence smoking causes cancer and heart disease, plus the bloom was already off the rose for me, after the heart attack. So I sold the stock, and quit smoking. I may be dumb, Larry, but I'm not stupid!

I can quantify the cost of irresponsible behavior given enough empirical data. Social scientist (oxymoron?) do it every day to come up with estimates that are considered within the ballpark of reality. Your rejection is rejected.

I stand corrected on interpreting your argument. I've lost track of why it's important though.

I think most of us are affected by moral judgements when we invest. We may not explicitly think about it but we exclude whole categories of possible investments like those I mentioned above. Moral judgements need not be emotional. I'm sure the outside managers we hire to run some of our money feel no emotion whatsoever when they exclude a security from purchase for our account.

I don't think either of us are asking anyone to hold the beliefs we do. But it is fair to ask what they believe. Whether or not they have ever really thought about it.

The punch line is, "I'm crazy, not stupid." You know the joke.

Well, Larry, considering the fact that most irresponsible behavior is also (often) irrational behavior, I have a great deal of difficulty picturing you in the role of a "social scientist," as rational a man as I know you to be. At least psychiatrists come up with reasonable-sounding explanations, which are supposedly funded in scientific analysis, and are (usually) rationally realistic assumptions about others. The "social scientists" have lots of trouble coming up with any estimates, about much of anything rational or realistic, particularly an economic analysis which makes any sense. Irresponsible or irrational behavior is not necessarily the same thing, but both are frequently unpredictable (as well as negative), and not dependably empirical in their nature, making such behavior altogether worthless as a viable factor which can be quantified realistically as an economic value, in my analysis. So... I also reject your rejection of my own. Are we finally CLEAR on this? (I didn't think so).

NONE of my arguments here are of any particular importance to anyone else, but you make a great series of interesting rebuttal arguments against them!

And while I completely agree that moral judgments certainly can be made without emotional influence, they will also frequently prompt an emotional response from anyone asked to adhere to the principles behind those judgments, who doesn't believe in them, or DOES believe in them, devoutly, among a community of agnostics. It is a part of the heritage of those who settled our state. Does that bring us back, full circle, to the beginning of this discussion, with the rest of those agnostic social investors, who make up the majority of our business world?

By the way, it is a fundamental part of my belief system that the punch line to that joke is, "I may be STUPID, but I'm NOT CRAZY," although your paraphrased assessment of my present mental state is probably much closer to the truth! Come on and get me; I'm ready to go again!

A bit late on the response, but I found a fund that is a perfect core holding for a 'socially responsible' investor - Vanguard FTSE Social Index Fund.

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the FTSE4Good US Select Index. The index is composed primarily of large- and mid-cap stocks that have been screened for certain social and environmental criteria by the Index sponsor, which is independent of Vanguard. The fund attempts to replicate the index by investing all, or substantially all, of its assets in the stocks that make up the index.

Sounds like a one-size-fits-all solution to me.

The problem with one size fits all is that there are so many flavors of social investing with each one using a different screen. If someone agrees with the screens in this fund, and if the fund performance is good, then it may be an acceptable solution. But a lot of social investors will have different concerns.

Agreed, but then again, for someone like me who doesn't factor in the social awareness of my investment targets, if I experience a moral epiphany, this would probably be my solution ;)

Besides the consistently noteable performance of Larry Stay's privately-managed socially-responsible funds, another portfolio manager who was one of my favorite clients was a gentleman named Greg Habeeb, head of Calvert family of socially-responsible funds (Bethesda, MD) taxable bond division.

Greg is a colorful and brilliant fund manager, with a mind like a steel trap and a memory like a filing cabinet. He is an absolute sports NUT, a well-informed and well-disciplined trader, highly aggressive and highly respected, a superb analyst who always does his homework, and is generally recognized by the investment banking community to be one of the most proactive and successful fund managers within the money management business today.

The Calvert Funds are comprised of 32 different socially-responsible funds, totaling approximately $12 billion in assets under management. Greg Habeeb personally manages nearly 50% of those assets among two large bond funds, the Calvert Income Fund (CFICX) and the Calvert Social Investment Fund Bond Portfolio (CSIBX & CBDIX).

The Calvert Funds are the oldest and largest family of socially-responsible mutual funds within the United States. Their screens include governance and ethics, environmental impact, workplace practices, product safety and impact, international operations, and human rights. They were the first mutual fund family to oppose apartheid in South Africa in 1982, and also the first to reinvest there after Nelson Mandela's victory in that nation's first open elections, held in 1994.

The Calvert Income Fund has earned annual returns of 7.99% over the last 10 years, according to Morningstar, which awards that fund with its highest five-star rating. This return compares with 6.61% averaged by the Lehman Brothers U.S. Credit Index over the same 10 year period, and with 7.11% averaged by Bill Gross's significantly larger ($93.5 billion) PIMCO Total Return Institutional Fund (PTTRX) for the same period.

The Calvert Social Investment Fund returned 4.5% vs. 1.96% for the Lehman U.S. Credit Index, placing fifth out of 183 similarly-rated socially-responsible funds, according to Lipper.

http://www.calvert.com/funds_performance.html

Walt, welcome aboard. I'm glad you enjoyed the discussion. Come visit again. Let us know what you would be interested in discussing.

Peace to you and your loved ones as well.

Larry

Larry,

Good article on SRI in today's WSJ.

If you would like the article in PDF format, here you go.

Thanks Jason, I read it this morning. I guess Bob is wrong, not all sin is sin according to Pax if it is offset by lots of good. Sort of like using Bingo to raise money for a church that is against gambling. Oops, can I say that?

I also read the article. If you think it proves I'm wrong (again), then I'm happy to admit I'm wrong. At what point in seeking increased alpha does your employer become willing to chuck their mandate to act socially-responsible, in the expectation of "growing their own funds?" And apparently, I mean Pax management's own personal funds, based upon that disclosure within the WSJ article. Do we also endorse such conduct, based upon the observation that management appears willing to put their money where their mouth is? There seems to be a lot of expert static in the background, applauding this approach. Or is management willing to foresake its socially-responsible commitment to the investors who put the first couple of billion dollars into their funds, in the hope of attracting lots more (less restrictive) investors to pay them increased management fees? If so, then how do we rationalize the troublesome S.E.C. investigation of Pax management's potential conflict of interest by such actions? It's only an investigation, right? Not an actual indictment (yet).

Could this be another classic example of how principles and ethics get sacrificed regularly these days, within the financial community, for the sake of pure greed? Pregnant is still pregnant, no matter how you slice it. Apparently, Pax doesn't mind putting their original investors through "the act of getting pregnant" (and we all know what that's derisively called, in slang terms, don't we?), as long as Pax doesn't have to face any consequences for also delivering "a blind eye" to those same investors.

Larry,

Another good article about SRI on Morningstar.com.

Also, is there a way that we can email you directly to suggest topics of discussion?

FTSE is large US growth. With Vanguard, it has a low expense ratio.

What are some inexpensive SR-funds (ETF's?) in other sectors, here and abroad?

Dear H,

I'm not sure, I've never really looked. SR-funds come in so many flavors, that you need to define what socially responsible aspects you wish to emphasize. Given that definition, we can probably find the least expensive fund in that arena with reasonable performance.

Have you looked at any others?