Mutual Funds with a Mission: Worth the Investment?

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Some mutual funds offer investors a profile with social responsibility as the chief selling point. Steve Inskeep talks to Jonathan Clements, financial columnist for The Wall Street Journal, about whether you can make a profit and make a difference at the same time.

STEVE INSKEEP, host:

In addition to making a difference with their donations, many Americans have tried to make difference on many issues with socially responsible investing. That means buying mutual funds that specialize in green energy or those that avoid tobacco and alcohol stocks. Jonathan Clements is the financial columnist of The Wall Street Journal and a regular guest here. He says socially responsible funds do not perform any better or worse than conventional funds.

Mr. JONATHAN CLEMENTS (The Wall Street Journal): If you're a starry-eyed optimist with a degree in finance, you might tell yourself some story sort of like this, that, you know, if millions of investors decided to avoid the bad companies and invest in the good companies, you could have this really beneficial effect on the world. What would happen is that the stocks and bonds of the good companies would go up while the stocks and bonds of the bad companies would struggle. As a consequence, these bad companies would find it more expensive to raise capital and as a result, they're not going to grow as fast. But...

INSKEEP: That's the starry-eyed optimism. What's the reality?

Mr. CLEMENTS: Well, the reality is, as we found out from looking at the performance of the mutual funds, is that the performance of these funds that invest in the good companies are no different than those funds that invest in all stocks. You know, if you're investing in one of these socially responsible funds, you may feel better about it but you're probably not making the world a better place.

INSKEEP: You're not making the world a better place?

Mr. CLEMENTS: You're not making the world a better place. You're not having a direct economic impact. In fact, I say to people, `If you want to have a direct economic impact, buy organic produce. Go out and buy more energy-efficient appliances, buy a Prius rather than a Hummer. I mean, there you're having direct economic impact.'

INSKEEP: Why wouldn't I make the world a better place? I mean, even if I'm not performing any better or worse than normal mutual funds, at least my money is going to somebody that I like.

Mr. CLEMENTS: Yeah, but there are plenty of people who are going to step up to the plate and say, `All right, this guy Steve, he keeps putting his money in all the good companies, but, hey, that leaves me this opportunity to buy the bad companies.' But, Steve, researchers have found something interesting. A couple of guys at Vanderbilt University have looked at the flow of money in and out of socially responsible funds and what they found, the money doesn't flow in and out of these funds quite as rapidly as it does with conventional stock funds. And that, I suspect, will have an interesting impact which is if people are more loyal to these funds, they're more likely to stick with them even though the performance of these funds is no better than that of other funds. The investors themselves may end up with better results.

INSKEEP: Hmm, because they hold on for the long term. Now can you just run through for us quickly a couple of socially responsible funds that seem to be doing particularly well and maybe one or two that aren't doing so well, that we should avoid?

Mr. CLEMENTS: TIAA-CREF has the TIAA-CREF Social Equity Fund. I mean, it's got low expenses, it's got a reasonably low minimum, and it's got a good track record. Similarly, Vanguard has a index fund that tracks a Calvert index of socially responsible companies that's also had decent performance. And then, you know, if you're more a conservative investor, you're looking for a balanced fund which is going to hold both stocks and bonds, Pax World has a balanced fund that's really done very well over the last couple of years.

INSKEEP: Jonathan Clements of The Wall Street Journal, good to speak with you again.

Mr. CLEMENTS: It's my pleasure, Steve.

INSKEEP: This is the part of the program when we sometimes give credits. And this morning, we are giving credit to Bruce Drake, the vice president for news who announced this week that he plans to step down. If you heard our coverage from ground zero or Baghdad or New Orleans, you were also hearing the result of Bruce's 14 years of effort and integrity behind the scenes.

This is MORNING EDITION from NPR News. I'm Steve Inskeep.

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