The Mises Institute monthly, free with membership
Volume 15, Number 11
by Gregory Bresiger
Making lots of money is evil say the politically correct. It's sleazy, socially destructive, and
almost always immoral, unless profits are given away to left-wing lobbying groups. Typical of
this trendy disgust with getting rich through capitalistic means is Socially Responsible Investing
(SRI), a nebulous set of investing standards embracing a host of "progressive" political causes.
Indeed, those who invest their money in mutual funds that follow these standards don't have
worry about making too much money. That's because most Socially Responsible funds normally
lag benchmarket indexes--like the S&P 500--and usually trail most other funds.
SRI funds promise nice returns, competitive with other funds. But they also say they can get
returns while avoiding supposed morally objectionable companies and investing in good ones.
However, the charters of these funds tie the hands of managers who are often forced to bypass
profits as a matter of principle.
The whole concept of SRI is confusing. What is acceptable today might be controversial
tomorrow. For example, the government once gave away smokes to soldiers, but tobacco now
ranks at the bottom of the socially responsible ranking of investments.
The best managers don't use SRI criteria because it hurts performance. Donald Yachtman,
manager of the highly successful Yachtman Fund, has returned some 25 percent a year over the
past three years. He makes a point out of buying politically incorrect stocks. His top recent
holding: Philip Morris.
It's easy to see why SRI funds so frequently perform badly. Fund managers are told to avoid
some or all of the following: tobacco and liquor stocks, gaming stocks, companies that lack a
sufficient percentage of women and minorities in executive positions, and companies without
Strictly enforcing these standards forces managers to pass up many of this nation's better
money-making companies, as well as opportunities in emerging market economies which are
capitalism. Shareholders in these SRI funds are shortchanged.
The Calvert Group, a fund company complex, is the SRI champion. No fund company has
SRI funds. Its officials clog up the fax machines of financial journalists with a myriad of releases
bragging about the company's wonderful work for the environment and gender pay equity,
complete with endorsements from liberal politicians.
One press release reads: "Calvert Group has been repeatedly recognized by Working
magazine and Personnel Journal for its workplace practices." Instead of stressing
the release brags that "in February of this year, President Bill Clinton singled out Calvert Group
for the firm's aggressive implementation of family leave provisions for working parents."
That's nice. Now what about "working parents" who put their money in a Calvert fund?
the story isn't so nice. Calvert has obtained lousy returns for its shareholders. Aren't the
shareholders the ones who are supposed to count the most? Apparently, presidential
commendations are more important.
A typical Calvert prospectus says the fund invests in companies "that make a contribution to
society through their products and services and manner of business." Let's hope, because Calvert
funds haven't been making much of a contribution to their shareholders.
Through the middle of August, Calvert stock funds for the year range from up 22.9 percent to
down 14 percent. This comes in a period when the market--as measured by the S&P 500--was
up some 26 percent, when almost anyone, including monkeys throwing darts, could make a load
of money. What does the adviser tell them? "Don't worry. Your fund manager is enjoying gender
Having Clinton endorse Calvert Fund won't help these shareholders pay for their retirements
finance their kids' higher education or buy their first home. Making matters worse, many Calvert
funds carry loads, which are sales charges. Some even carry 12b1 fees, the most notorious ripoff
in the fund industry. How socially responsible is it for Calvert to double and triple charge
investors for funds they can get elsewhere without these charges? All these loads and extra
charges are great for the fund company, but terrible for the investor.
ValueLine, a fund-monitoring company, gave the Calvert funds poor ratings in a 1996
Using a scale of one to five, with five the worst and one the best, Calvert's general equity funds
received a 4.0 rating. Its international equity funds are even worse. The rating was 4.8, according
to ValueLine. Besides that, Calvert, for the third year in a row, has made Smart
magazine's dysfunctional fund family. Don't look for any of this in Calvert's press releases.
Still, Calvert officials keep harping on their commitment to gender pay equity, which is a
ridiculous idea given that we are all individuals, at various stages of our careers, and therefore
our worth to the company varies tremendously. "In some categories, women employed by
Group actually make more than their male counterparts," according to a company release.
But what has this to do with getting strong returns for the investors? Most people couldn't
less who is running their money, provided the person is doing a good job. Peter Lynch and John
Templeton became popular not because they are male; they became popular because they never
forgot that their investors were depending on them to make money.
The key reason for Calvert's poor returns are the political criteria used for Socially
Investing. If we followed this theory to its logical conclusion, we'd look askance at almost every
For example, if SRI investors want no part of tobacco and booze stocks because they're
unhealthy products, why not also boycott companies that make millions selling high-fat premium
ice creams (like the heavily ideological Ben and Jerry's)?
How about soft drinks? Why aren't SRI companies blacklisting them? All that sugar and
are awful. And why no protests against coffee companies? And surely nothing is worse for the
soul than television, which rots people's brains to boot. Why not shun investments in
Too much of almost anything can be bad for someone at some time in his life. Any
business can generate a debate about "obscene profits." The portfolio manager who agrees to go
along with SRI will face ever more restrictions. He will fail for lack of a consistent strategy
focused on profits.
This is far from accidental. It reflects a fundamental problem at the core of investing based
socialist rather than economic criteria. When people like Clinton argue for policies like extended
family leave, quotas in the workforce, and high tolerance for union organizing, they always
hasten to add: "it's good business."
The truth is, putting supposed social concerns above profit is not good business. It cripples
firm, forces hiring and promotion decisions on factors like race and sex instead of productivity
and skill, and puts the welfare of aggregates like "the environment" ahead of real people. In
short, it attempts to subsidize firms made in the image of failed social democratic governments,
while pretending to retain market standards of profitability.
But the SRI movement finds its rationale, not in economics, but in psychology: it is a failed
attempt of the socialist mentality to come to terms with the overarching reality of capitalism's
success. Besides, profitability and social consciousness are not in conflict. When any company
makes a profit, it is serving society's economic needs. It allows for the expansion of capital
investment, and thus jobs and opportunities for all. True social consciousness should focus on the
But SRI funds do point the way to solving a myriad of political debates in this country.
Whenever a politician suggests a new tax, mandate, or regulation on business, let's first try it out
on one of these "Socially Responsible" companies, purely on a voluntary basis. Let it
taxes, insurance premiums, and wages, while adopting ever more rigid quotas and union rules.
Then we can watch what happens to its stock price relative to everyone else's. Any takers?
Gregory Bresiger is a financial journalist in New York.
FURTHER READING: "Socialism as an Emanation of Asceticism" and "Ethical Socialism"
Ludwig von Mises, Socialism (Indianapolis, Ind.: LibertyClassics, 1981 ), pp.
388-98; and How To Pick the Best No-Load Mutual Funds for Solid Growth and
Sheldon Jacobs (Irwin Professional Pub., 1991).