A recent trend in the mutual fund industry is cause based investing. Many of these funds avoid certain holdings because they contain items that people may not want to invest in due to their beliefs.
This post is not about the value of these beliefs in any way, but more to get you to think about what is really accomplished by this investing. It’s been shown that this type of investing has lower return then the overall market. It also typically has significant expenses compared to other investment types. So, the first thing to realize is this is not the place to park your money if your looking for the best return.
No Impact on the Company
But what about impacting the companies that sell the things you don’t agree with? This seems to be the most common argument for doing so. The problem with this argument is the lack of a likelihood of impact. Besides the fact that your investment in Big Evil Corporation is a drop in the bucket compared to the investment of the millions around the world, there is the importance of how the stock market actually works. When you buy a stock unless it is an IPO the money does not go to Big Evil Corporation. It goes to Joe Investor who just sold his stake in Big Evil Corporation to you. Somewhere along the line when the initial stock was issued the company collected a payout, but usually when you buy a stock you are not buying it from the company but instead from some other investor. So, from a stock perspective you’re ultimately not impacting them in any way. Even if you purchased the company’s bonds, your impact in a sea of investors is probably near 0. So you are not impacting their bottom line.
Money Segregation is Impossible
Well, what about if you don’t want to profit from these activities? This seems to be a valid theoretical argument, but the implementation makes this goal practically impossible to achieve. You see, many corporations invest their own money in other companies or have a wide set of affiliates that could be in many things you cannot screen. The simple act of parking money at a bank, either based on your own bank account or the accounts of another company you purchased, could result in the money being loaned to the companies you are trying to avoid.
The final thing to remember is money is fungible. All money entails is a method of exchange measuring the value of goods. If a company invests any of its money in a cause you do not support, and you loan them money, you are supporting it regardless of whether they state that money will not be used for that cause. A company/bank/fund only has so many assets. Your contribution adds to these overall funds, but does not truly influence where they invest unless you manage all of those funds. If a hypothetical company wants to spend 20% of their funds on Big Evil Corporation (BEC) and they promise you that the extra 100 dollars you give them will not go to BEC, then all the company will do is divert 20 dollars of the money they had previously not earmarked for BEC in BEC, and put your money outside of BEC. Since money is fungible you have essentially invested in BEC.
Feel free to invest in these vehicles if they make you feel better, but realize it is really psychology and marketing once you understand how the market and economy works in the background.