A case for adding morally responsible investing to a DC plan

When it comes to investing, most defined contribution plan participants focus simply on the bottom line — the rate of return generated and how much money they made. Many investors don't consider that the companies in which they invest might violate their strong personal beliefs.

The good news is that investors don't have to compromise their values if they invest in a morally responsible manner. Research shows the average equity fund with a moral bent has outpaced the Standard & Poor's 500 index over the 10-year period ended Dec. 31, according to Morningstar Inc. This proves that one can build a portfolio that generates both financial and moral returns.

Morally responsible investing is a subset of the more commonly known socially responsible investing, which often screens out companies engaged in tobacco, alcohol, nuclear power, defense, oil and “unfair” labor practices. According to Morningstar, there were 198 SRI funds representing $65 billion in assets as of Dec. 31. Morally responsible funds can be different in that they might screen out companies that conflict with moral values such as abortion, embryonic stem cell research and pornography.

Morally responsible investing should be incorporated into a defined contribution plan for several reasons. The first is simply due to demand. According to a US SIF Foundation/Mercer report, more than 65% of employees without an SRI option would like one added. (The US SIF formerly was known as the Social Investment Forum.) Despite this demand, only 14% of plans offer a socially or morally responsible investing option, according to Mercer. While much of this demand might be attributed to the rise of “green” consciousness, we believe that morally responsible investing appeals to a wide range of investors.

Another key reason to add morally responsible investments to a DC plan is alignment with the mission of the plan's investors. Religious-oriented organizations might want to invest in a manner that is consistent with their beliefs. Regardless of religious orientation, morally responsible investing might be most appropriate for conservative, pro-life and pro-family investors.

On the surface, a morally responsible investment option might appear no different from its non-morally responsible investing counterparts. There are fund offerings covering most major assets classes: equities, fixed income and balanced portfolios, as wells as domestic and international securities and companies of all market caps. Investment managers in this genre may employ value, growth or a blended style of management. A morally responsible investment should complement other investments available in a defined contribution plan.

One concern about a morally responsible investing is the potential opportunity lost by not being able to invest in companies that violate a moral screen. Investors may take solace in the fact that they really aren't missing much. Based on the moral screens employed by the Ave Maria Mutual Funds, only a small percentage of investible companies are excluded. Of the companies in the Russell 3000 index, approximately 150 do not pass the moral screens, meaning 95% of the companies can still be considered for investment.

Some individuals will be placated that their investments are aligned with their moral values and will be indifferent in regards to their returns, but many will desire to have their proverbial cake and eat it, too. Our research shows that investors using a morally responsible investment mutual fund can “do well, by doing good.” Of the 198 aforementioned socially conscious funds, 82 have a distinct religious focus. Among these are funds with various investment objectives, and they use different asset classes.

Because equities have historically provided the greatest returns and should be the foundation of any long-term investment plan, we conducted an additional screen to segregate equity funds. As of Dec. 31, our research indicates of the 82 funds there are 42 funds in this subset we refer to as “religious focus equity funds.” Such funds usually invest in accordance with religious faiths such as Baptist, Catholic, Lutheran, Mennonite, Presbyterian and Judeo-Christian values. We then compared the returns of funds in this subset with the S&P 500.

On average, the Religious Focus Equity Funds group outpaced the index for the 10-year period ended Dec. 31, 2011. In the morally responsible investment approach, value and values really are complementary concepts.

In our opinion, investing requires a rational, orderly, business-like approach, which balances initiative, prudence and maintenance over an extended period of time to yield positive results.

With the availability of thousands of investment options, defined contribution plan participants should be able to invest in a manner consistent with their personal beliefs. Plan sponsors should incorporate a morally responsible investment option into their offerings because of the growing appeal among investors to align their portfolio with their morals.

George P. Schwartz, CFA is President and CEO of Schwartz Investment Counsel Inc., Bloomfield Hills, Mich., the investment adviser for the Ave Maria Mutual Funds and Schwartz Value Fund.