 Personal Finance PowerPoint Presentation Socially Responsible Mutual Funds Prepare to get financially fit by practicing personal finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable So once again click the link below for a free month membership to our website and all the content on it Most of this information comes from Investopedia the as socially responsible mutual funds which you could find online Take a look at the references, resources, continue your research from there This is by Shanna Carter Haeford, updated July 13, 2022 In prior presentations we've been taking a look at investment schools, strategies, tools Keeping in mind, the two major categories of investment That being, the fixed income, typically the bonds the equities, typically the common stock also thinking about tools we might be using like mutual funds funds. ETFs possibly helping us to better diversify with less of an initial investment upfront as opposed to investing in individual stocks, individual bonds. Keeping that in mind, we're now looking at socially responsible mutual funds. Some investors are comfortable with the idea that unscrupulous means are sometimes necessary for making gains in a portfolio. However, it is possible to profit while using an ethical investment strategy and you don't need to join Greenpeace to do so. So let's take a look at the issue here. So when we're individual investors, we could invest in individual stocks and bonds. And if we do so, we can pick the companies that we want to be investing in. But oftentimes that's not what individual investors do because it's hard to get a diversified portfolio and it can be costly that way. So we usually are going to be using, say, mutual funds and ETFs. If we have a 401k plan, for example, or an IRA, that's also usually using some kind of mutual fund that is under the umbrella of, say, some kind of retirement plan that gives us a tax benefit. Now, the mutual fund or ETF will be pooling money together along with other investors, allowing the fund manager then to be allocating that money in accordance with the rules of the mutual funds. We might have one mutual fund that's going to try to be very broadly diverse, possibly have stocks, bonds, and so on. Or we might have more restrictive mutual funds that are going towards a specific segment. We might try to have mutual funds that are in accordance with, say, an index, which is going to be investing in a certain sector or something like that. Now, one of the problems with mutual funds could be that some companies, you might say, I don't want to be associated with this particular company for whatever reason. And so you'd be saying, well, if I invest in a mutual fund, it could be that some of my money is going to some companies that I would rather not be giving my money. Whereas if I was investing individually, I'd be able to pick the stocks that I'm going to be investing in. So that can become an issue. And one way they've kind of tried to fix that issue or one strategy that has been put into place is to use these socially responsible mutual funds. Now, there's pros and cons to this kind of strategy. I tend to be becoming more and more skeptical of it because I think it's becoming more of a brand type of thing and it gives a lot of power to the person that is stamping on this kind of label that adds value to a mutual fund just because it has that label that looks like it could be a place where abuse could happen. But I don't have a problem with the concept in general. So you might, for example, look for mutual funds and not try to invest in certain sectors because you don't think that particular sector lines up with whatever your core principles would be or you'd rather put your money somewhere else. So you can use other strategies to kind of get to a similar goal or you can just look for fund managers that are investing with an eye towards what you think is the best investment strategy which might take into consideration your objectives as well. The objectives here are going to be specific to the socially responsible mutual funds. So you want to look at their objectives and whatever that stamp means to your objectives line up to that. And if they do, then that might be one place you want to go. But it seems to me, again, I'm getting more and more skeptical of the labeling and the bureaucratic bodies that have the capacity to put this label on there and so on. So as more investors demand socially responsible investing, SRI options will take a look at SRI and how you can use socially responsible mutual funds to incorporate this strategy in your portfolio. So it's becoming bigger and bigger of a thing. So you're going to hear about it and you're going to have to want to have an idea of what is going on, what are the benefits and what are the pros and cons of it. So what is socially responsible investing? A socially responsible investing strategy is one that views successful investment returns and responsible corporate behavior as going hand in hand. Now the question, of course, there is what is and who is determining corporate responsible corporate behavior. And so if you want to make your own determinations on that, then you might try to self select the mutual funds and investments that go in alignment with that. If you want to outsource that to someone else to make those choices, then this is one kind of you can try to use this kind of strategy to do so. SRI investors believe that by combining certain environmental, social and governance, those are the ESG criteria, with rigorous investment standards, they can identify securities that will earn competitive returns while helping build a better world. SRI analysts gather information on industry and company practices and review these in the context of a country's political, economic and social environment. So generally, these seven areas are the focus of socially responsible investors. So we got one, you got the corporate governance ethics. So these are gonna they're gonna review these things and see if they give the stamp of approval to good to call it in this category, which gives it the brand name, which you would think would add value to to the investment. So possibly drawing more money, more capital into it. So number two, so workplace practices, number three, environmental concerns, number four, product safety and impact, number five, human rights, number six, community relations, number seven, indigenous people's rights. So it should be noted that SRI is essentially promoting adherence to the positive aspects of these areas with publicly held companies. However, SRI also gets a lot of attention for industries and companies that it opposes as bad for society. So and again, this becomes kind of a political type of thing. And this body becomes somewhat political in terms of their power. So what is good? You know, what is bad and in different contexts can be it can be a, you know, a hard thing to determine. So in any case, the latter would include, among others, businesses involved in gambling, tobacco, weapons and alcohol. So these so called sinful investment categories are often eliminated from holdings through the SRI screening, socially responsible mutual funds, hold securities and companies that adhere to certain social, moral, religious, or environmental beliefs to ensure that the stocks or bonds chosen embody values that coincide with the funds principles company issuers undergo a careful screening process. So here we go with who's the one that determines, you know, these kind of categories, for example, an SRI mutual fund will only hold securities and companies that adhere to high standards of good corporate citizenship. So what are socially responsible mutual funds? Because people have such a wide variety of values and beliefs, fund managers have significant challenges in determining which stocks reflect the optimal combination of values for attracting investors. The criteria used when screening for stocks depend on the funds theme values and goals. For example, funds with a strong sensitivity toward issues of environmental concern will pick stocks and companies that go beyond fulfilling minimal environmental requirements. So this is the big one, I think is the big issue they focus before on, you know, the tobacco and so on and so forth. Those are kind of the ones that were in the headlines, you know, in the past, the current ones that are in the headlines are usually related to this environment and the global warming type of debates. And so how should we be approaching this whole global warming problem? And how should we be approaching, you know, company activity in different countries and so forth with government policy, which is a kind of a complex, complex set of issues. Many socially responsible mutual funds also will earmark a portion of their portfolios for community investments. A common misconception is that these investments are donations. This is not the case. These investments allow investors to give to a community in need while making a return on their investment. Many community investments are put toward community development banks in developing countries or in lower income areas of the US to be used for affordable housing and venture capital. Ownership is taken seriously. Shareholder activism sometimes referred to as company engagement is one of the most important hallmarks of SRI funds. They use their ownership rights to influence management through policy change suggestions. This advocacy is achieved by attending shareholder meetings, filing proxy proposals, writing letters to and meeting with management and exercising voting rights. Because it is difficult for fund shareholders to exercise their votes individually, voting is achieved by proxy fund shareholders assigned management to vote on their behalf. Proof that individuals can make a difference is illustrated by the proposal, the Securities and Exchange Commission, the SEC regulatory body, federal body passed in January 2003, which states that all mutual fund companies must disclose proxy voting policies and procedures and their actual votes to their shareholders. The SEC's decision was brought about by thousands of proposal requests sent to the commission by socially responsible investors. Does good triumph overall. As an investor, you can't be completely philanthropic expecting nothing in return for your investment other than the feeling of having invested in a company that reflects your own values. And honestly, this is where the things get a little kind of kind of go a little bit too far in my opinion. Obviously, if you're investing in a company that's not making a profit in a marketable and in a market condition, then then they're not doing a good job, right? Because the profit should be reflecting the fact that they're doing stuff that people want in a free market and people are choosing to basically pay for it. So, you want an efficient company working in a free market to be making a profit. If you're putting your money in places that are making profits, then you're probably putting your money in the places that are doing the most good because you're putting money in businesses that are efficient, that are doing well in any case. So, how does the performance of SRI mutual funds measure up to that of conventional portfolio? On average, the performance of SRI funds have been close to that of regular mutual funds. There are several indexes that track the performance of stocks considered to be socially responsible investments. According to MSCI, the annualized growth returns for the MSCI KLD 400 social index initially called the DEMINI social 400 index between July 30th, 1999 is its inception date and June 30th, 2022 were 6.55%. Over the past 10 years, the index has delivered a 13.31% annualized return compared with a 12.65% annualized return from its parent index, the MSCI USIIMI, which comprises a broad set of small, mid, and large cap US companies. So, the price of doing good SRI mutual funds sometimes have higher fees than regular funds. This premium in fees can be attributed to the additional ethical research that mutual fund managers must undertake. So, in addition, socially responsible funds tend to be managed by smaller mutual fund companies and asset under management, AUM can be relatively small. Under these circumstances, it is difficult for SRI funds to make use of the economies of scale available to their larger rivals. So, there could be higher expenses related to them. Keep a level head. Before you let your emotions become your investment advisor, it is wise to maintain a level head. Here are some important tips to follow to maximize your chances of earning decent returns and investing in qualified SRI funds. Number one, get informed. Learn about SRI, which funds qualify using these criteria and where you can buy them. Number two, know your values. Everybody's values are different. Some may feel strongly about environmental causes while others are more concerned with social programs rank your concerns. Once you have established a few top values, you may narrow your fund choices to a few select funds whose values closely match your own. Number three, go beyond your values. Research the fundamentals and fees of the fund in which you are interested. Some items to consider include the level of the management expense ratio, the cost of load fees, the fund manager's track record, and how the fund has performed over the past few years. So, there is no need to sacrifice investment quality when considering an SRI mutual fund. Do your homework as you would for any kind of investment. So, number four, diversify. A consequence of investing in SRI funds is that you may be limiting your investment to a few companies that have a lot of common socially, ethically, and financially. So, now you've got less diversification possibly. Think of a sector fund with a portfolio formed mainly from stocks in the tech industry. So, if you had all your eggs in that basket during the internet market crash of 2000 to 2002, for example, all of your eggs would have been broken. And this is a key point because remember that the diversity is going to be one of our primary objective. That's the thing that's really going to be saving us generally for our long-term type of investment. So, if we're using a strategy like this, we want to still make sure that we are diversified. And note, again, I have nothing wrong with the concept of the strategy, saying, hey, look, if I'm investing in particular companies in mutual funds or outside of mutual funds, I want to put my money in companies that I agree with in terms of their objectives, or at least not be putting my money to companies that I particularly do not agree with. But I think oftentimes these kind of things often end up to be kind of like brand names where we like to say, hey, I invest in this particular thing as kind of a brand to kind of have like the bragging rights of it. For example, and I think oftentimes the things that they lean away from are things that are necessary, but they have societal bad consequences as well that we have to think about. But those are going to be more complex problems that we're going to have to get together and solve without, you know, you're not just going to be able to solve it by shutting down the whole company. So, that would be things like production. Production because it creates greenhouse gases is an issue. How do we deal with that? Do we shut down all U.S. companies which would just shift production to China, for example, or do we have some other solution that we can come to here? So, it's more complex than just not putting your money to a U.S. company, for example, in my opinion, or some people don't like pharmaceuticals or some people don't like the farming industry for whatever reason. But usually these are necessary things for humanity that have side effects that we have to think about, but they're more complex than just, I would think, just pulling your money from them, which would make you less diversified. And that means that a lot of times people end up putting all their money into the tech stocks because those are the ones that aren't actually producing anything. It's just a thought process kind of thing and they don't have a lot of assets and, you know, greenhouse gases and whatnot oftentimes except Bitcoin, I guess apparently does. In any case, make sure you're diversified to the point. If your overall investment is placed strategically in different types of holdings, the possibility of you of losing all your assets is minimal. If you want to be a socially responsible investor, it is still possible to diversify your portfolio with other stocks, bonds, or U.S. treasury without compromising your values, investing more broadly in socially responsible securities with values that differ somewhat from the focus of your chosen fund can help. So what's the bottom line? SRI opportunities suggest that investors need not compromise their values to make money. If you approach SRI mutual funds like any other investment, you may be able to put your money into securities and companies that align with your values while potentially boosting your investment account balance.