Anti-Social Behavior

By DAVID MOON, Moon Capital Management
June 25, 2006

Was the Presbyterian Church (USA) right in 2004 'to initiate a process of phased, selective divestment in multinational corporations operating in Israel"? No, argued Jim Roberts, chairman of the Committee to End Divestment Now, recently in the Wall Street Journal.

Right or wrong, the church's decision was based on non-investment rationale''as was Mr. Roberts' objection.

Both Mr. Roberts and his church would probably be financially served by basing their investment decisions on investment-related issues. Neither, however, indicates that this is a primary goal of these investment decisions.

If you want to foster social change with your money, my advice is to give your money directly to people and causes that support those issues. Investing in public companies that meet some definition of 'socially conscious' does little but limit the universe of stocks from which you can choose.

Limiting that universe can be costly. The Social Investment Forum Foundation publishes an honor roll of mutual funds that direct at least one percent of their assets into 'community investing.' The best of the mutual funds offered by these ten companies are mediocre. Most are clearly sub-par performers. Two of the ten are downright awful.

The only fund in the entire group with above-average performance is the Women's Equity Fund. According to its prospectus, the WEF 'places a priority on investing in companies that promote the social and economic status of women in the workplace.'

Ironically, the fund is managed by a man. At the Women's Equity Fund, something is more important than social causes. I suspect it has something to do with money.

Let's assume you decide you don't care if you limit your investment choices or even if you're almost guaranteed to earn inferior returns. You are dead set on pursuing a particular social cause with your investment portfolio. That is easier said than done.

For example, many of the socially responsible honor roll mutual funds own Wal-Mart, the poster child of worker exploitation. I wonder how many socially-intentioned fund owners know that?

It's not uncommon for some people to want to avoid all companies that manufacture or market cigarettes. Although Phillip Morris changed its name to Altria, most investors can still identify this company as an evil tobacco bandit.

But what about M&F Worldwide? If you saw that stock in your portfolio, would you object? Probably not, since you likely don't know what it does. If I told you M&F is a candy company, would you still object on the grounds of your aversion to tobacco companies? What if you knew that the company's primary product was licorice? You might not care for the candy, but that's no reason to throw your cigarette penalty flag ' or is it?

Most of M&F's sales are to the tobacco industry, where the licorice flavoring is used to flavor cigarettes. You would never have known.

If you're willing to give up one or two percentage points a year of your return, just give that money to the charities of your choice. Then invest the remainder of your capital in the assets that give you the most opportunity to fulfill your financial objectives. You'll have more money to do good works.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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