From the September 2007 issue of Boomer Market Advisor • Subscribe!

Here to stay

Socially responsible investing, in the modern sense, has been around since the late 1960s but its roots can be traced to religious traditions that date back much further. According to the Washington-based Social Investment Forum, Methodists in the United States have managed money using "social screens" for more than 200 years. But is contemporary SRI a fad used to attract boomer money? Why is the strategy appealing to boomers? Are they sacrificing return to chase social investment? And can boomers who believe in SRI really effect change at the corporate level?

Fad or lasting appeal?

Boomer crazes have come and gone, whether it's bell-bottom pants, pet rocks and diets too numerable to list, so it's understandable to think SRI might come and go in the same fashion. But numbers point to SRI's longevity. According to the Social Investment Forum's "Report on Socially Responsible Investing Trends in the United States" for 2005, $2.29 trillion is currently under professional SRI management (see sidebar). This figure is up almost 250 percent since 1995 and accounts for nearly $1 of every $10 of total assets under management.

One reason SRI has been able to avoid obsolescence is due to its ability to change over time. What may have begun as a way to avoid companies in certain industries -- tobacco, alcohol, gambling -- has changed into a way to invest for the future. SRI funds no longer operate solely on an exclusionary basis, according to one source at Calvert, a fund leader in the area of SRI.

"Socially responsible investing has morphed into a sustainability model," says Geoffrey Ashton, senior vice president of marketing for the Bethesda, Md.-based fund company. "Choices are not necessarily based on avoidance criteria anymore. We are looking for forward-thinking companies."

Forward-thinking companies are concerned about the environment and sustainability, as well as a solid financial future. One advisor who specializes in SRI sees a correlation between boomer investments and their desire to make a difference.

"Baby boomers are quite used to thinking of life in an integrated fashion," says Laurie McClain, AIF, principal of Socially Responsible Financial Advisors in Eugene, Ore. "They are used to putting their money where their mouth is. Often, their purchasing reflects their own social goals."

Even if those goals have morphed over the years, boomers are still interested in being catalysts for change. Affordable energy from the sun, wind and water? Why not? American ingenuity put a man on the moon; why can't that same ingenuity create sustainable energy models and do it profitably?

"That sector of investors grew up in the 1960s and '70s when the ideals that led to SRI were forming," says Stu Dalheim, Calvert's manager of advocacy and policy. "They were coming to a head. SRI really got going in the '70s and '80s; it was a natural extension of boomer ideals."

Diminishing returns?

The question of how SRI funds measure up has sparked discussion. Calvert's own Web site shows its Social Index has underperformed the Lipper Multi-Cap Core and the S&P 500 over one-, three- and five-year periods ended Jan. 31, 2007, 5.25 percent vs. 6.31 percent and 6.82 percent, respectively for five years. More than 5 percent is still growth; it exhibits positive performance. And as more than one source points out, due to the increased level of screening, SRI mutual funds often have higher expense ratios, which can adversely affect performance.

As most advisors are taught, returns can be measured in a number of ways: financial and personal. Quantitatively, a fund's returns are measured against indices, other funds, historic data and other benchmarks, which is what most financial professionals specialize in. But returns also can be considered qualitatively, against an investor's personal benchmarks. An investor who sees that the Calvert Social Index is a couple percentage points lower than the S&P and still says socially responsible investing knows what he is getting into.

"An advisor has to ask a client, 'What do you mean by social? What is important to you?'" McClain says. "It's not about what the advisor thinks is socially responsible; it's about what the client wants."

The corporate scandals of the early 2000s led investors to demand greater transparency, greater accountability and greater diversity on their boards of directors. Dalheim points to two global companies that responded to shareholder criticism even before the fallout from Enron, WorldCom and the like hit the market hard.

"Nike and Gap received criticism about their overseas suppliers in the 1990s," Dalheim says. "Both have come a long way since then, and both are considered leaders in developing codes of conduct."

Those companies are now part of a number of SRI funds because of their actions. He says this is solid evidence shareholders make a difference when they make their voices heard. So while the venue and method of delivery may have changed, boomers are still on the front lines of changing the way things are done -- the boardroom has replaced the streets and proxy has replaced protest. What may have looked like a fad as it hit its stride in the 1980s is now an accepted investment strategy, moving from excluding companies it viewed as poor citizens to actively looking for those companies that are creating sustainability for the future. So no matter one's view of social responsibility, there is a way to grow investment dollars and increase one's peace of mind.

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