Investors are snuffing out more Big Tobacco dollars from their investment portfolios than ever before and, not surprisingly, many of the do-gooders are church-affiliated healthcare institutions.
Tobacco companies stand out as public enemy No. 1 of the "socially responsible investing" movement. But proponents of values-driven investing don't stop with Joe Camel. Gambling concerns, liquor purveyors and companies that have anything to do with abortion and contraception also rank as popular targets of mission-minded healthcare institutions.
According to Lincolnshire, Ill.-based Hewitt Associates' latest survey of healthcare investment practices, 15% of responding hospitals and 35% of healthcare systems placed social restrictions on their investment portfolios. Eleven percent of hospitals and 19% of systems reported kicking the tobacco-investing habit.
"I think that's an area that will continue to grow," predicts Jerry Judd, vice president of treasury services at Denver-based Catholic Health Initiatives. Judd says CHI is part of a group of Catholic institutions that's creating a socially responsible index fund, which will be managed by Mellon Bank. Citing banking regulations, a Mellon vice president declined to discuss the product while it's under development.
But John O'Toole, a senior vice president with Mellon Equity Associates, an investment management subsidiary of the Pittsburgh-based bank, notes a growing awareness and desire among his hospital clients to link mission and investment policy. "More people are examining social screening or adding it to their investment policies," he says.
A new survey by Washington-based Social Investment Forum shows a surge in appetite for investments that reflect social concerns. This year socially and environmentally responsible investing accounted for $1.2 trillion in assets, or about one in every $10 under management in the U.S., the survey found. In 1995 the total was $639 billion. The 1-in-10 ratio is based on the $13.7 trillion in investments under professional management according to the 1997 Nelson's Directory of Investment Managers.
When the organization first tried to quantify the practice 13 years ago, social investing represented $40 billion of assets.
"The practice and field of socially responsible investing is growing in so many sectors," says Elizabeth Elliott McGeveran, a Forum spokeswoman. "You name the issue. People are starting to understand this is a very important way to address social and environmental concerns."
Anti-tobacco sentiment is driving much of the growth, she says. "It's one of the main things," especially among hospitals and healthcare investors, she says.
The trend also reflects greater interest in investing overall, McGeveran says. However, she notes a difference in the investment practices of baby boomers. The 33- to 51-year-old crowd is leading the charge to integrate financial behavior and social values.
Some institutional investors also are seeking to mend the moral disconnect between their convictions and their coffers. People who work in hospitals or who serve on boards of directors "are starting to ask tough questions," she says.
Yanni-Bilkey Investment Consulting, a Pittsburgh-based investment adviser, recently sponsored a symposium on socially responsible investing.
"It's a concern of ours because we have those types of clients," adds Joseph Karpinski, senior vice president of the firm, which represents about two dozen religious organizations, including healthcare institutions.
Some of his clients have practiced what they preach for years. Others are now taking a closer look at linking their beliefs to their investment practices. "It's a delicate balance between what's socially responsible and what their fiduciary duty is as well as what's economically feasible," he says.
Although hard figures weren't available, social investing is believed to account for a tiny portion of healthcare institutions' total assets available for investment. Critics say that's because socially screened investments don't offer competitive returns.
Only five of 39 socially responsible mutual funds tracked by Morningstar, a Chicago-based financial information company, had beaten the Standard & Poor's 500 over the 12-month period ended Oct. 31. None surpassed the S&P 500's three-year average annual return of 27.49%.
But do those numbers tell the whole story?
"Mutual funds' past performance does not sum up the validity or the potential of socially screened investing," says Laura Lallos, a Morningstar senior analyst. Generally, socially responsible funds have been managed by smaller fund families with fewer dollars to attract top money managers, she says. "It hasn't been the screens that are really holding them back."
Not coincidentally, she says, two of the top-performing funds are index funds, which track broader-based indexes and mirror the overall market. Because index funds are passively managed, they don't require superstar managers.
One fund often cited for its outstanding performance is the Domini 400 Social Index. The market-capitalization-weighted common stock index posted a 12-month return of 32.74%, beating the S&P 500's gain of 32.10% during the same period. The index's three- and five-year returns have closely tracked the broader index.
The Domini 400, maintained by Cambridge, Mass.-based Kinder, Lydenberg, Domini & Co., uses a variety of "exclusionary" and "qualitative" screens to weed out unacceptable investments. For example, any company that makes money on alcohol or tobacco or derives 2% or more of sales from military weapons systems gets the boot. Kinder, Lydenberg, Domini also sifts through companies based on their diversity, employee relations, environmental record and community relations.
Socially responsible mutual funds are mostly used by individual investors, Lallos says. But that doesn't mean institutional investors aren't doing social screening.
Mellon Equity, for example, develops individual investment portfolios tailored to clients' needs. "I think most of our clients have felt our returns in screened portfolios have been very competitive with nonscreened portfolios," O'Toole says.
And industry sources say some healthcare institutions may be willing to sacrifice a little bit of return for the sake of mission. "I think it really gets back to this idea of mission," O'Toole adds.
The American Medical Association's call this spring for a ban on tobacco industry investing, if nothing else, helped stoke the flames of mission-driven investing.
"What they've helped to do is let these institutional investors know that this issue is coming," says McGeveran of the Social Investment Forum.