Socially (Ir)responsible Mutual Funds - Part Two
By Shauna Croome

In part one of this series we discussed what socially responsible mutual funds are, how they came to be, and why investors may want to choose them. There is, however, a whole other side to the equation: socially irresponsible investing. Let's take a closer look at what irresponsible investing is and why this investment strategy developed. What are Socially Irresponsible Mutual Funds? As the name suggests, socially irresponsible mutual funds hold baskets of stock from companies whose line of business or activities are considered unethical. These activities might include things such as the distribution or production of alcohol, tobacco, and weapons. Sometimes referred to as sinful stocks, these companies might also engage in unethical business practices such as child labor or environmental negligence. No Lack of Beliefs Unlike socially responsible investors who hold strong convictions towards sinful stock, socially irresponsible investors, in their focus on making significant returns, are indifferent to the unethical actions of corporations. This isn't to say that people investing in sin stocks support the use of unethical business practices; these investors simply believe that certain companies will always have opportunity to profit from people's consumption of so-called immoral products. As an illustration, let's consider Altria Group (formerly known as tobacco giant, Phillip Morris). Because responsible investors are opposed to making money off a deadly habit, they avoid investing in tobacco stocks. Tobacco firms, however, have traditionally faired well during slowdowns because smokers simply can't live without cigarettes: cigarette-maker Altria is up over 60% since the market peak of March 2000. Different Faces Within the classification of socially irresponsible mutual funds, there are different names for funds with different strategies. "Leisure funds," for example, invest a large portion of their assets in casinos and alcohol and tobacco companies but also maintain a sense of diversification. Like many socially responsible mutual funds, leisure funds prevent over specification of many sector funds. For example, the Fidelity Select Leisure Portfolio invests in restaurants such as McDonalds in addition to casino hotels such as MGM Mirage. Another example of a socially irresponsible mutual fund is the vice fund started by Mutuals.com in 2002. Unlike leisure funds, the vice fund invests solely in the casino, defense, tobacco, and alcohol industries, which doesn't provide adequate diversification. The Extinction of Socially Irresponsible Funds? If supporters of socially irresponsible funds believe that the underlying companies will display strong earnings in both good and bad markets, why are these funds hard to find today? Socially irresponsible mutual funds became popular in the 1980s in response to the increased popularity of socially responsible funds; however more recently these funds have largely disappeared from the market. The reason could be that these funds border a very thin line between insult and profit. For example, Morgan Funshares, one of the few remaining leisure funds, was originally called Morgan Sinshares. Because the original name was not entirely politically correct, it was at risk of being offensive. As an alternative to socially irresponsible mutual funds, many well-known equity mutual funds hold sinful stock along with the stock of mainstream companies such as banks, retailers, technology, and manufacturing firms. Challenges within the Sinful Industries A further reason for the disappearance of sinful funds is the changing views of people in regards to health and the environment. As a whole, the tobacco industry has taken a hit due to declining sales and lawsuits. As of March 2003, the Dow Jones Tobacco Index has seen a 33.42% decline in just one year. In addition, the Environmental Protection Agency is continually approving heightened restrictions in their environmental laws and regulations. Many companies are required to reduce emissions and to adopt practices that provide for sustainable development. As a result, companies that have historically been heavy polluters are now starting to clean up their act. You can decide whether or not sinful stocks should have a place in your portfolio. The screening process of any investment, however, should not be aimed specifically at unethical firms. Instead it should be about selecting quality companies that, regardless of their industry, have good earnings, management, and high growth potential.

By Shauna Croome