Ethical Investments

Many of us investors feel a bit uneasy about some of our holdings. I own shares of Wal-Mart (NYSE: WMT), for example, and am a little conflicted about it. I can offer reasons to both buy and sell it:

Buy, because:

• The stock seems attractively priced, relative to its historical range. Its price-to-earnings (P/E) ratio has recently been around 19 or 20, while its average P/E was above 25 from 1999 to 2004.
• It's been a strong grower and great performer for shareholders for many years, and it still has room to grow.
• It serves a useful purpose in America, offering low prices to consumers.
• It even pays a dividend, which is likely to grow over the years.

Don't buy, because:

• There is an awful lot of credible reporting out there asserting that the company doesn't treat many employees very well. (Though I've personally spoken with some who are quite satisfied with their jobs.)
• As Wal-Mart spreads across the land, it's hurting lots of other businesses, from mom-and-pop competitors to major supermarkets and retailers.
• There are plenty of other good investments out there.

Socially responsible investing
If concerns like these matter to you, you should consider learning more about socially responsible investing (SRI). Some folks assume that it can't be an effective way to invest because it screens out and ignores so many powerful performers. But according to an interview with SRI pioneer Amy Domini that I recently read in SFO magazine, the Domini 400 Social Index has outperformed the S&P 500 in the 15 years it's been around.

I looked up the Domini Social Equity Fund (FUND: DSEFX) to see just how good it is, and found that its performance over the past decade hasn't been all that different from the S&P 500's. (About 250 companies sport berths in both, revealing a lot of overlap.) So, you might say, why not just invest in the S&P 500? Well, by opting for the Domini fund, you might sleep a little better at night knowing that some companies have been excluded because of ethical concerns.

Here are the recent top 10 holdings of the fund:

• Microsoft
• Johnson & Johnson
• American International Group
• Intel
• Procter & Gamble
• JPMorgan Chase
• Cisco Systems
• Wells Fargo
• Amgen
• PepsiCo

Still, you can probably do even better than the S&P 500 index fund and even better than the Domini fund. Consider, for example, checking out our Motley Fool Champion Funds service, which you can do for free. Our analyst, Shannon Zimmerman, has recommended many outstanding mutual funds (a free trial will permit you to peek at the entire list), including a socially responsible fund that has gained some 10% in less than a year and has roughly doubled the market's return in that period.

I'm not here to disparage the Domini family, though. Amy Domini deserves a lot of credit for helping build the important field of SRI, and her fund has a very respectable record. She had some interesting things to say about a bunch of companies in the interview, and offered some valuable insights into the SRI world. For example:

• Much depends on an SRI fund's philosophy. She noted that another SRI fund divested of Starbucks (Nasdaq: SBUX) shares because the firm entered into an agreement to put its name on some liquor. But her fund kept Starbucks because it screens out companies that make alcohol, not those that simply distribute it.
• She pointed to some underperformance in her funds in recent years due to not owning companies such as ExxonMobil (NYSE: XOM), which have been recent strong performers.
• She pointed to complexity in the field, noting that "Procter & Gamble (NYSE: PG) has agreed to convert most of its Millstone brand to fair-trade coffee; that will make them the largest purchaser of fair-trade coffee in the world." Yet, "I know they have forestlands in Canada where they are accused of tearing out old growth forests, which is a terrible thing to do. I have other concerns when I study Procter & Gamble, but they are taking one step closer to social responsibility, and that allows me to own these stocks."
• She noted that Gap (NYSE: GPS) and Nike (NYSE: NKE) have both entered the conversation about working conditions at foreign factories, and each has published a detailed report on where the company stands and where it can improve.

A while back, Domini Social Investments asked the Securities and Exchange Commission to require mutual funds to reveal how they vote on their proxies. (Because mutual funds are typically major shareholders of many companies, how they vote on company matters can make a big difference in corporate America.) Well, their wish became law -- funds now have to 'fess up. So that's another reason to be glad that SRI funds are around.

Keep learning
If you'd like to learn more about socially responsible investing, check out these articles:

• Is Socially Responsible Investing Possible?
• The Myth of Socially Responsible Investing
• The Myth of Socially Responsible Investing, Part 2
• Cemex Profits From Good Works
• Visionary Venture Capital

It's a fascinating field, and even if you don't invest entirely according to some SRI principles, you may want to incorporate a few into your investing strategy, or snag some shares of a few companies you can be proud to own.

In the meantime, do give our Motley Fool Champion Funds service a whirl -- it won't even cost you anything to get started, and you may discover a whole bunch of terrific funds.

Selena Maranjian's favorite discussion boards include Book Club, Eclectic Library, and Card & Board Games. She owns shares of Microsoft, Johnson & Johnson, and PepsiCo. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. JPMorgan is a Motley Fool Income Investor recommendation. Microsoft is a Motley Fool Inside Value recommendation. Gap is a Motley Fool Stock Advisor recommendation. The Motley Fool is Fools writing for Fools.