One of the things that I've come to realize about "conventional wisdom" is that while it's most certainly conventional, it often contains little wisdom. One of the most obvious examples is that just a year ago conventional wisdom indicated that this country just wasn't ready to elect an African American as President of the United States–maybe someday, but not yet. The fallacy of that argument became obvious on the evening of November 4, 2008.
Investment thinking is also beset by the tyranny of conventional wisdom. I'm particularly speaking of socially responsible investing and the idea that one automatically accepts lower returns as a consequence of doing the right thing. From what I've seen there's more and more research that shows that socially responsible investors do not pay a performance penalty, and in many cases enjoy returns in excess of the market averages. Yet there's still that conventional wisdom, as exhibited by an article I read at ConsumerReports.org, from November 2008 with the title: "Principles versus Performance," and the subhead, "Socially responsible funds let your conscience be your financial guide. But you might have to settle for lower investment returns."
"All of the fact-based research that I've seen has suggested that's a myth," counters Adam Strauss, one of the portfolio managers for the Appleseed Fund, which was named as Lipper's top returning mid-cap value fund for 2008 and as the top SRI fund by Morningstar.
Despite the accolades, 2008 was not the fund's best year. "We were down 18%, versus the market, which was down 37%," Strauss admits. "We didn't make money, but on the other hand we're happy that we were better able to preserve capital than most."
Strauss thinks that one of the reasons that perception about SRI investing persists is because investors following that strategy are much more passionate about the S and the R than they are about the I.
"Most socially responsible investors are very passionate about the issues and they're going to talk about the issues that are important to them," he observes. "To us, the issues are important, but generating strong long-term returns for our clients, and for our shareholders, is also very important, so we try to talk about both. I think that the socially responsible investment community has to do a better job of talking about both if socially responsible investing is going to become a more mainstream investing strategy than it is today."
Not Just SRI, but Value
Strauss stresses that while the Appleseed Fund undoubtedly subscribes to a SRI philosophy, it's also a value-oriented fund. It was launched in 2006 by Chicago-based Pekin Singer Strauss, which had been running a value-oriented separately managed account product since 1990.
"There's a lot of research that's shown over long periods of time that value investing significantly outperforms the market," notes Strauss. "There's also a lot of research that has shown that socially responsible investing outperforms the market. If you look, for example, at the Domini 400 Index, it's outperformed the S&P 500 Index since its inception. And we're focused not just on the one-year period, but on very long periods of time."
Although he says his firm wasn't aware of it at the time that it launched the Appleseed Fund, his own research has shown that the fund is somewhat of an anomaly in the SRI world due to its focus on value stocks.
"We discovered that less than 5% of all of the [SRI] mutual fund assets under management are classified as value and the rest are classified as core or growth, when across all mutual funds it's typically one-third/one-third/one-third. So there's a real under-representation and, among value funds, there's hardly any socially responsible funds."
