A Fair Shake at Socially Responsible Investing

I was 24 when I bought stock in a company for the first time. The decision to become a stock market investor at a young age had a dramatic and positive impact on my life. Two decades later, I am passionate about educating women (especially millennials) to become successful investors so that they too can achieve financial independence and empowerment. It concerns me when I read articles about the large number of millennials who are shunning the stock market.

When young people do decide to invest in equities, they are more likely than older generations to invest in socially responsible companies, even if their investments result in lower returns. According to a 2013 survey conducted by U.S. Trust, 61 percent of millennials surveyed said they’d be willing to accept a lower return from companies that make a positive impact on society and the environment.

The concept of socially responsible investing (SRI) is not new. The good news is that there are now socially responsible mutual funds and low-fee exchange traded funds (ETFs) that sometimes outperform benchmark indexes (such as the Standard & Poor’s 500 index or the Russell 2000).

So if that is where the bar is now set, is there any reason to sacrifice returns for social good, especially when our younger generation may not have pensions or Social Security as a safety net when they retire?Socially responsible investing for millennials

The latest SRI play is the Pax Ellevate Global Women’s Index Fund (PXWEX), launched by Sallie Krawcheck, one of the best-known and accomplished women on Wall Street. The fund is comprised of global companies that support the advancement of women through gender diversity on their boards of directors and in executive management. Of the nearly 400 companies in the fund, a number of them—Yahoo, Xerox and Avon—are run by female CEOs. Others have several women on their boards. Some studies suggest diversity on corporate boards can lead to better stock performance.

When Krawcheck announced she was launching PXWEX as the first and only mutual fund in the U.S. that invests in global companies with strong records in advancing women, I couldn’t wait to take a look under the hood and answer the question for myself: Is this fund a good investment?  Krawcheck has already answered that question in stating that the fund provides investors the opportunity to make a “fair” return while expressing their social values.

But is “fair” good enough?

Sallie Krawcheck

Sallie Krawcheck

As a woman, I admire Krawcheck and applaud her for highlighting hundreds of companies that are committed to advancing women leaders. As I examined the list of companies that comprise the fund, it occurred to me that female job-seekers in the U.S. and around the world would find this list invaluable.

As a financial adviser, however, I cannot recommend PXWEX to my clients, nor will I be purchasing it for my own portfolio.

There are two primary reasons for this: fees and performance.

1) Fees. In my book, Every Woman Should Know Her Options: Invest Your Way To Financial Empowerment, I compare mutual funds to the guy I used to call when I didn’t have a better date. Mutual funds do the job but often carry high fees. For a cheaper alternative, I recommend ETFs or index mutual funds with very low expense ratios. Although PXWEX is not actively managed (as it mirrors an index), I find the expense ratio of 1 percent to be high for a passively managed fund. According to PXWEX’s prospectus, if an individual invested $10,000 in the fund and it returned 5 percent annually, at the end of 10 years the investor would have paid $1,213 toward expenses of running the fund. Contrast that to the Vanguard Total World Stock Index Fund (VTWSX), which would result in $351 in expenses over the same period.

2) Performance. Let’s not forget the primary reason individuals need to invest for growth: so they don’t outlive their money. Long-term performance, therefore, really matters. Over three-, five- and 10-year periods, PXWEX underperformed benchmark indexes for funds that invest in both domestic and international equities. Dividends are another important consideration. I recall watching Suze Orman on TV during the 2008 bear market when she advised, “Get paid to wait.” During periods of stock market volatility, income generated through dividends can help offset some losses and soften the bumpy ride. At less than 1 percent, the dividend yield of PXWEX makes for a very thin cushion.

There is a better way to invest in companies that advance women. Investors can use the list of holdings in Krawcheck’s fund as a guide and create their own customized portfolio by selecting several companies that pay high dividends or have excellent long-term growth prospects. Low-cost ETFs representing various asset classes can be added to the portfolio for diversification. In my opinion, every woman should learn how to build a basic portfolio, either on her own or with the help of a financial adviser.

The reality, though, is that most women don’t have the time or interest to do what I suggest. For the female investor who is just starting out, Krawcheck’s fund may be just the ticket to build engagement. One of the perks Krawcheck plans to offer members of her Ellevate Network (previously known as 85 Broads) is an opportunity to invest in PXWEX at a lower cost, applying the fee schedule for institutional investors. This is the type of innovative leadership that will get millennials exposed to the stock market and launch them on their path to financial empowerment.

Editor’s note: The information contained herein is strictly for educational and illustrative purposes, providing commentary, analysis, opinions and recommendations and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security.

 

 

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