Socially responsible investing refers to an investment strategy that considers the potential impact of your investments on society in addition to your financial needs. Although it is strictly a personal choice, some investors prefer to align their investment decisions with their social values and philosophies. If this idea appeals to you, Dimensional Fund Advisors (DFA) offers the following socially responsible funds:
DFA US Social Core Equity 2 Portfolio
DFA International Social Core Equity Portfolio (DSCLX)
DFA Emerging Markets Social Core Equity Portfolio (DFESX)
DFA Social Fixed Income Portfolio (DSFIX)
Each of these funds invests in securities that have been screened according to a series of social issue criteria developed by an independent third party. These screens focus on eliminating companies involved in businesses such as alcohol, tobacco, gambling, pornography, and the production of landmines and cluster munitions. Companies cited for unfair labor practices, and in particular, child labor, are also omitted from these funds.
Socially responsible funds should not be considered a separate asset class, but rather an alternative framework for investing in conventional asset classes. Our approach to building client portfolios with these funds centers on capturing dimensions of higher expected returns, such as the small cap and value premiums, in a cost-efficient manner, just as we would using standard DFA funds.
The DFA socially responsible stocks funds are all core equity funds, meaning that each fund is broadly diversified across its entire asset class. This provides several advantages over building a portfolio with funds that represent smaller components of each asset class. Turnover and transaction costs are reduced because there is no need to sell a stock that migrates from one component to another. For example, a small cap stock that performs well over a sustained time period will eventually become a mid cap stock, and then a large cap stock. This company can remain within a core equity fund throughout this process, whereas, it would have to be bought and sold several times if were held within small cap, mid cap, and large cap funds. The broad diversification of the core equity approach also provides opportunities for DFA to add value through patient and disciplined trading.
Another concern that some investors have is the potential environmental impact of their investments. DFA has approached this issue by organizing a Sustainability Funds Council consisting of a group of consultants and wealth managers unaffiliated with DFA whose mission is to research the best ways to provide investment solutions that promote environmental sustainability. The Council has developed a scoring system for companies based on their carbon footprint, greenhouse gas emissions, depletion of fossil fuel reserves, and other factors, such as land use, biodiversity impact, toxic spills, operational waste, and water management practices. DFA offers the following funds that invest in companies with the highest sustainability scores within their respective industries:
DFA US Sustainability Core 1 Portfolio (DFSIX)
DFA International Sustainability Core 1 Portfolio (DFSPX)
The annual returns of the DFA socially responsible and sustainability funds can vary a few percentage points from their analogous respective standard DFA funds, but the long term returns should be very similar. One drawback is that DFA has not yet offered tax-efficient versions of these funds, which may limit their use in taxable accounts. Please contact me at jbrown@shearwatercapital.com or 314-497-6809 if you are interested in having us include these funds in your investment portfolio or if you have any questions.
Jeffrey J. Brown, MD CFA