Socially Responsible Investing
The notion of “socially responsible investing” first gained widespread attention during the 1970s, when such highly charged political issues as the Vietnam War and apartheid in South Africa led some investors to try to make sure their money didn't support policies that were counter to their belief systems. Since then, a wide variety of investment products, such as socially conscious mutual funds, have been developed to help people invest in ways consistent with a personal philosophy.
Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you believe are socially harmful) doesn't mean you have to forgo pursuing a return on your money. Depending on how you define “socially responsible investing,” I believe that it allows one to further both economic interests and the greater good. In fact, my firm, RGA Investment Advisors only makes investments after screening for strict moral and socially conscious attributes that we believe are essential identifiers of truly sustainable, scalable, and defensible portfolio company.
There are many approaches to what may also be known as mission investing, socially conscious investing, green investing, sustainable investing, or impact investing. I wanted to take a moment to discuss how investors can employ these elements to make socially responsible investments for their own portfolio(s).
Screen for the Public Good
Perhaps the best-known aspect of socially responsible investing involves evaluating investments based not only on their fundamentals but also on their social, environmental, and even corporate governance practices. The process eliminates companies from an ‘investible universe’ whose products or actions are deemed contrary to the public good. Examples of companies that are frequently eliminated from these screens are those involved with alcohol, tobacco, gambling, or defense, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.
However, as interest in socially responsible investing has evolved, the screening process has shifted to identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of religious beliefs.
Be an Active Shareholder
Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In many cases, having a good social record can enhance business, making a company more attractive to investors who might not have previously considered it. Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices. Such activism got a boost when the Securities and Exchange Commission adopted the so-called "say on pay" rule as a result of the Dodd-Frank financial reforms. Companies over a certain size must allow shareholders a vote on executive pay at least once every three years. Though the vote is nonbinding, it could give institutional investors a stronger hand in advocating for other interests.
Explore Community Investing
Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing, including nonprofit organizations. Investors provide money that is then used to offer or guarantee loans to organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care. Community investing often helps not only individuals but also small businesses that may operate in geographic areas that mainstream financial institutions deem too risky or otherwise unsuitable for their investment objectives.
Invest with Impact
A recent development focuses on measuring and managing performance in terms of social benefit as well as investment returns. So-called "impact investing" aims not only to minimize negative impact and enhance social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. In fact, some have made a case for considering impact investing an emerging alternative asset class. Impact investments are often made directly in an individual company or organization, and may involve direct mentoring of its leaders. As a result, such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly correlated with traditional assets such as stocks or bonds. For many years I had been actively involved with a terrific organization called Echoing Green; a impeccable example of this type of initiative. Echoing Green has provided nearly 600 promising social entrepreneurs working in over forty countries with $33 million in start-up funding, customized support services, and access to a vast global network of proven business leaders. Entrepreneurs or “fellows” involved in this program have gone on to launch, and now lead, some of today’s most important social enterprises throughout the world. Please contact me if you'd like more information on this organzation, I'd be more than happy to make an introduction with their leadership.
Focus on the Broader Picture
One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have. Even if you choose to focus on a single social issue, you may still need to decide whether to invest in a specific company or companies, or invest more broadly through the use of mutual funds whose objective meets your chosen criteria. These decisions are some of the tougher ones to make.
Unless you're familiar with the science behind a specific company's product or service, you might benefit from casting a wider net or finding a socially responsible investment advisor to help you allocate your resources. Though diversification can't guarantee a profit or eliminate the possibility of a loss, it can help you manage the amount of risk you face from a single source. Be careful when investing in mutual funds; carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Be sure to read the prospectus carefully before investing. Also, make sure your expectations are clear and realistic. Many socially responsible investments achieve solid financial returns; others may not. Though past performance is no guarantee of future results, you should have a sense of what kind of return you might expect. You shouldn't feel you have to accept mediocrity in order to support your beliefs. Monitor your investment's performance, and be prepared to look elsewhere if your investment doesn't continue to meet your needs, either financially or philosophically. The clearer you are about what you hope to achieve with your money, the easier it should be to find a suitable way to invest it.
I hope this information helps you better understand socially responsible investing and further enables you to seek out investments that meet your own socially conscious objectives. Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.
Jason M. Gilbert, CPA/PFS, CFF
As the end to 2013 quickly approaches, you’re probably starting to think about how to rebalance your portfolio. Most individual investors don’t really think about asset allocation when crafting their basket of investible securities. If you did structure your portfolio with certain objectives in mind, there is no doubt that your allocation now is different from what it was at the beginning of the year. Market forces, for better or for worse, change the relative weight of assets in a given portfolio. If equities perform well, you might find yourself too heavily weighted in this particular asset class, with insufficient downside protection or cash flow yield. If stock prices go down, you might worry that you are no longer able to reach your financial goals in the timeframe you initially set.
Assuming you created a portfolio with a strategic objective and allocation, have you developed a strategy for dealing with these changes? You'll probably want to take a look at your individual investments to ascertain whether they still fit your investment philosophy, but you'll also want to think about your asset allocation and how any periodic adjustment of it would help you achieve your investing objectives.
Obviously, simply making no changes would be easiest. On an emotional level, if you’re happy with your portfolio’s current return profile it may be difficult to make any significant changes. We are all guilty of subscribing to a “if it ain’t broken, don’t fix it” mentality. Of course, allowing the status quo to persist may affect how well your investments will continue to match your goals, especially during unexpected (and eventual) turns in the market. At a minimum, you should periodically review the rational for your investment choices to ensure that they still hold.
It might feel counterintuitive, but selling the winners and buying the losers (or other investments in underrepresentitive sectors) can bring your asset allocation back to the original percentages you had initially set. This ‘constant weighting’ of relative investment types ensures that your portfolio grows at a proportional rate, factoring in all asset classes represented in the portfolio.
Let's consider a hypothetical example. If your equity allocation in a portfolio that originally represented 50% is now at 70%, rebalancing would involve selling some of the stock and using the proceeds to buy back enough of the other asset classes to bring the portfolio back to 50% in equities. Similarly, if stocks now represent less of your portfolio than they should; to rebalance, you would invest in stocks until they once again reach an appropriate percentage of your portfolio. Maintaining relative percentages not only reminds you to take profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.
When should rebalancing take place? One common practice is to rebalance a portfolio whenever a particular investment represents significantly more than it’s intended share of the portfolio (we call this a ‘tolerance band’); say, 5% to 10% of the total portfolio. One could also set a regular date for rebalancing, say, tax time or year-end.
You could also adjust the mix of investments to focus on companies and sectors that are expected to do well in the future. This is obviously a more speculative approach, and one that more active individual investors attempt to employ. I would not recommend this strategy as a sustainable practice for long-term portfolio growth.
A Hybrid Approach
You could also combine the above two strategies by maintaining a constantly weighted asset allocation with one portion of the portfolio. With another portion of the portfolio, you could try to take advantage of short-term opportunities, or test specific sectors that you believe might benefit from a more active investing approach. By monitoring your portfolio, you can always return to your original allocation.
A Bottom Line Approach
Another plausible solution is to set a “bottom line” for your portfolio; that is, a minimum dollar amount that the portfolio cannot dip below. If you wish to be active with your investments, you can do so--as long as your overall portfolio stays above your bottom line. I do not advocate active management in this fashion, but with this strategy you could theoretically move the portfolio to very conservative allocation (more conservative securities or cash) to protect that baseline amount. Keep in mind that many speculative investments are illiquid, which presents additional and significant problems when trying to exit losing positions.
Key Rules for Rebalancing:
Don’t forget about taxes and transaction costs
Frequent rebalancing can trigger tax consequences and expensive transaction costs. Check on whether you’ve held particular securities for over a year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains. This doesn't affect qualified accounts such as 401(k)s or IRAs, which are tax deferred.
I hope this information is helpful to you as you work to rebalance your investments for the year ahead. Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.