NEW YORK (TheStreet) -- Goldman Sachs (GS) - Get Report investment strategist Abby Joseph Cohen and Deutsche Bank's (DB) - Get Report Mark Fulton say socially responsible investing, once the province of do-gooders, may produce better returns.
Socially responsible investing is picking up the pace. During the past year,
environmental mutual funds
Gabelli SRI Green
returned 58%, while
Winslow Green Growth
Socially responsible mutual funds aim to invest in good corporate citizens. Those include companies with strong records for treating employees fairly and protecting the environment.
Can green funds and other socially responsible investors outperform over the long term? Some Wall Street analysts think so, and they're pounding the table for a variety of social investment strategies.
Companies with sound environmental and social policies are likely to produce better returns, Goldman's Cohen argues. Speaking at a recent United Nations conference on climate change, she said many major institutions plan to invest in companies that are leaders in managing environmental risks. That will boost green shares over the long term.
Fulton, a climate-change strategist at Deutsche Bank's asset-management arm, is urging clients to overweight stocks that are involved in emissions reduction and clean-energy production. Government-stimulus funds will encourage green building and spending on energy-efficient technology, Fulton says.
Wall Street's enthusiasm for social investing represents a marked change from the past. When socially responsible funds appeared in the 1970s, most analysts saw them as do-gooder investments that weren't likely to outperform the benchmarks. At the time, social funds used simple screens, eliminating companies that polluted or made harmful products such as tobacco. Portfolio managers could buy any stocks that didn't trigger warning flags.
Academic studies showed that eliminating a few stocks had little impact on fund performance. On average, social funds returned about the same as conventional competitors. Social portfolio managers liked to argue that shareholders could support worthy approaches without hurting their pocketbooks.
In recent years, funds have taken a more active approach. Instead of just eliminating a few bad apples, managers are seeking to own companies that have the best programs on the environment and human resources.
The social funds have expanded their screens to include issues of corporate governance. Managers favor companies that disclose financial information and protect the rights of shareholders. "The aim is to find companies that are leaders in their industries," says Julie Gorte, senior vice president for sustainable investing for
Pax World Management
Social portfolio managers argue that their new approach not only does good, it also produces higher investment returns. "These days the best-run companies focus on their environmental risks and try to treat employees fairly," says Cary Krosinky, vice president of
, which evaluates companies according to their social policies.
Recent studies have looked at the performance of companies that win high social marks. Of 16 academic studies, most indicated that shares of socially responsible companies have outperformed their benchmarks, according to
, a consulting firm.
Deciding which companies are the best citizens requires making subjective judgments. But social funds aim to follow clear standards, giving extra points to employers who insure safe conditions in factories and take steps to lower emissions. A company that consistently wins praise is
International Business Machines
, Krosinky says. IBM has a diverse workforce and is expanding its sales of software that can be used to solve environmental problems.
To own a solid fund that aims to own responsible companies, try
Calvert Social Investment Equity
. During the past 10 years, the fund has returned 3.9% annually, outdoing 97% of its large-growth competitors. Calvert focuses on dominant companies with solid balance sheets that have slipped out of favor.
When concerns about health reform sank stocks in the health sector, Calvert portfolio manager Richard England began shopping. His holdings include drug retailer
, a maker of orthopedic implants.
Another fund that focuses on responsible companies is
Pax World Balanced
, which has returned 2% annually during the past decade. The fund keeps from 50% to 75% of its assets in stocks, with the rest in bonds. As the market was tanking in 2008, manager Christopher Brown had 62% of assets in stocks. Since then, he's increased the allocation to 72%, figuring that stocks would benefit as the economy begins to expand.
To profit from increasing corporate purchases of technology products, Brown owns
, a maker of networking equipment, and
, a provider of data-storage systems.
Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.