Saturday, November 12, 2005

Socially Responsible Investments Risky?

The Socially responsible investments may let you stay away from the tobacco, alcohol, weapon manufacturers, and nuclear power stocks, but socially responsible investments may be very risky for your investment portfolio.

The Calvert Social Index is widely used benchmark for the universe of the socially responsible stocks. As of 9/30/2005 it included 633 stocks in the index. The P/E ratio of the Calvert Social Index as of 9/30/2005 was a whopping 44.8. The S&P 500 index includes 500 stocks, and as of 9/30/2005 the P/E ratio of the S&P 500 index was just 17.9.

When I compare the book values of the two indexes, I see the same picture. The Price/Book ratio of the Calvert Social Index was 4.4 at the end of September 2005. The Price/Book ratio of the S&P 500 index was 2.8 at the same time.

Everyone knows that the perceived socially irresponsible stocks like tobacco companies trade at very low P/E ratios, but I never imagined that they bring down the P/E of S&P 500 index by more than half. Without socially irresponsible stocks the S&P 500 could trade at very high premiums.

The Vanguard Calvert Social Index Fund (VCSIX) benchmarks Calvert Social Index. I wasn’t surprised to see that this fund is not too much popular among the investors in the Vanguard index fund family. The current assets under management are less than $400 million.


David said...

I don't think there is anything "socially responsible" about refusing to invest in weapons manufacturers.

Unless one is an absolute pacifist, then one will acknowledge that we need a military. It would be callously irresponsible to ask people to serve in a force that protects us and then to deny them the best equipment for doing so.

Indeed, people who think like this are the *opposite* of "socially responsible." They are so concerned with their own purity that they disregard the interests of society.

Strabo the Lesser said...

I have investments in Alcohol and munitions. The nice thing is that munitions and alcohol may be slightly countercyclical- the worse the international scene, is the more guns we need. And people drink more when times are bad.

muckdog said...

I don't have a problem with these kinds of funds. I do have a problem with public pension agencies (ie, calpers) pressuring companies to conform to some check list of items that would make them a "good" company vs. a "bad" company. I wish they'd just mind their own business. Heck, they're underfunded anyways. Why are they worrying about CEO pay or the like?

Market Participant said...

Another related issue is that the companies like Altria (aka Phillip Morris) pay out much of the dividends that are essential to total return.

The KLD socially responsible ETF, as barely any volume (avg volume 8500) compared to the IWB (R1000) ETF.

Market Participant