September 1, 2006
Today's Wall Street Journal has a wonderful article by Diya Gullapalli on "socially responsible" stocks ("Pax May Bless Some "Sin" Stocks"). Socially responsible stocks are under performing the market and the responsible of Pax World Funds is to redefine what is socially responsible. Starbucks now sells a coffee liqueur (in a joint venture with Jim Beam) so Pax had to drop Starbucks, for example. Under the new rules, Pax can invest in Starbucks (the liquor sales are di minus). The story is a classic. Investment funds tout so form of responsible investing -- no "sin" stocks or no "polluters" stocks, do well for a while (bragging all the while) and then, over time, watch the sin or polluters stock outperform the fund and the fund under perform a relevant market index. Investors should assume such returns and enjoy their feelings of moral superiority (like folks who go to jail for civil disobedience; the analogy is not perfect here many are rewarded with University tenure). They cannot have it both ways, moral superiority and returns (no jail for civil disobedience). The only focused, responsible funds that seem to do better than the market over time are the corporate governance focused funds, the ones that only invest in well governed companies. Imagine that.
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