A New Approach To Managing Socially Conscious Mutual Funds
The Total Social Impact Foundation Inc. has developed .
Rather than excluding companies from a portfolio completely because they sell tobacco or have bad environmental records, the Cincinnati nonprofit organization uses public information to rate the success of all companies in the S&P 500 stock index at serving eight groups of stakeholders: customers, employees, investors, suppliers, competitors, the community, the environment and society as a whole.
Portfolio managers at Summit Investment Partners L.L.C., Cincinnati, a unit of Union Central Life Insurance Company, calculate a social impact multiplier by dividing each S&P 500 companys social impact score by the median S&P 500 score, then use the social impact multiplier to determine how much of each companys stock to own.
“We own every company in the S&P 500, but reweight them,” says Stephen Dillenburg, who is vice chairman of the Total Social Impact Foundation and manager of the Summit Total Social Impact fund portfolio.
Dillenburg says the weighting approach gets around some of the problems associated with the traditional emphasis on screening out “sin stocks.”
For one thing, Dillenburg says, “you and I might be of different faiths.”
Two investors who disagree about the morality of selling alcohol or tobacco might have a far easier time agreeing on the statement that companies ought to treat employees fairly, he says.
Dillenburg also argues that the use of public information, rather than the proprietary survey data collected by many traditional socially conscious fund managers, might be a healthier approach to socially conscious investing.
By using public data, “we are encouraging transparency of information,” he says.
Dillenburg, an Air Force veteran and fund management veteran, proposed the social weighting concept to Larry Pike, then Union Central chairman, in the late 90s.
Pike supported the proposal, Dillenburg says, because he agreed that companies should try to do right by all their stakeholders, not simply the stakeholders interested in the latest earnings-per-share figures. Union Central acted on Pikes convictions in December 2000, by seeding the new, socially weighted S&P 500 stock index fund with $5 million.
Funds often have trouble gaining much traction before they celebrate their fifth birthday and get their stars from Morningstar Inc.
The Summit social impact fund has had a particularly hard time because it was started when U.S. stocks were peaking.