Darren Zagarola, a certified financial planner and CPA with EKS Associates in Princeton, New Jersey, told PLANADVISER the most common myth is that SRI funds’ returns underperform the broader universe of funds. According to Zagarola, this is probably the reason—other than the lack of understanding about how available SRI options are—that more investors and plan sponsors do not use SRI.
Zagarola noted there is much research that shows returns are the same for SRI funds as any other funds, and in addition, findings from the U.S. SIF Foundation that one in nine investors are using SRI, and that number is growing, supports the evidence that returns are comparable. “People won’t put money into funds that are not giving them equal returns,” he said.
Many investors think there is a premium to invest in SRI products. Zagarola said the reason for this myth is expense ratios for SRI funds are slightly higher than for large-cap mutual funds. He explained that SRI fund expense ratios are more in line with small-cap and international mutual funds because more research needs to be done for SRI products just as with small-cap and international. “So in comparison, SRI fund expenses are in line with those of other funds that use more research,” he said.
Many investors also think they cannot create a fully diversified portfolio with SRI products only. However, Zagarola pointed out that socially responsible companies are everywhere—from the small-cap to large-cap to international markets. There are more opportunities now than 10 years ago. He noted that data from the U.S. SIF Foundation shows there are now more than 360 SRI mutual funds or exchange-traded funds (ETFs) available and the number keeps growing. The total number of SRI products has grown from 493 to 720, including alternatives such as hedge funds. According to Zagarola, once investors get past 20 or 25 holdings in a portfolio, they are not getting more risk management or diversification.
Perhaps because SRI has not hit the mainstream, many investors think it is a new concept. “This is probably the most-quoted myth of SRI,” Zagarola said. However, he pointed out that the concept grabbed hold of investors in the ’70s and ’80s with the Dow chemical protest and the anti-apartheid movement, so it’s not new, just growing in popularity.
SRI is not only for the wealthy as some believe. The introduction of SRI mutual funds and ETF products make SRI available for every person. Zagarola said it is up to advisers to make sure plan sponsors know they are available. As advisers get to know their clients and clients’ values, they can make recommendations for SRI. The plan sponsor may have a religious, social or corporate governance focus. “People tend to think they cannot make a difference,” Zagarola said, but he noted examples of protest movements in the past that made social of ethical differences to countries and companies.
A portfolio does not have to be 100% in SRI to meet values. The example Zagarola gives is, “I recycle, but I don’t recycle everything.” While an investor’s portfolio should not be 10% in SRI products and the rest in sin funds, it does not have to be 100% in SRI products to make a difference.
Zagarola noted how socially responsible investing is turning into a sustainable and responsible investing movement (see “Running the Fund: Win-Win”). “An investment doesn’t need to be called an SRI product to be sustainable, a great company is sustainable,” he said.
Zagarola concluded it is up to advisers to make sure plan sponsors know the truth about SRI and how available products are, and include SRI in investment policy statements (IPSs) if so desired.