Socially Responsible Community Investing

Community investing involves the direct investment of capital to underserved members of communities through local community banks/lenders (also called collectively, “Community Development Financial Institutions” or “CDFIs”). If they were to apply for loans through traditional commercial banks, these lenders provide access to credit, equity and capital that these businesses or individuals would otherwise never have access to. Community investing can also be accomplished through venture capital funding.

By investing directly in a community, an investor is more likely to have a greater impact on social good. While buying stocks of companies may or may not promote social good, money invested in a CDFI or venture capital fund is put to work directly and right away to promote underserved communities.

SRI PRODUCTS: TRENDS

MUTUAL FUNDS AND EXCHANGE-TRADED FUNDS (” ETFs”).

Second, mutual funds are a passive way to invest in SRI with no control over company selection. If you take a closer look at some of the holdings of the mutual fund companies that profess to invest in socially responsible companies, you may be surprised to find companies that are not really aligned with SRI values.

While mutual funds provide a valid way to invest in a diverse group of companies that represent specific social values, they have certain limitations that you should consider before you invest.

Many mutual funds just can’t beat a simple, static product that tracks an index, like exchange-traded funds (ETFs). One of the first SRI indexes, the FTSE KLD 400 that began in 1990, has continued to perform competitively -with returns of 9.51% from inception through December 31, 2009, compared with 8.66% for the S&P 500 over that same period. For a fraction of the cost of investing in a mutual fund, you can simply buy shares of an ETF that tracks the FTSE KLD 400 and do just as well if not better.

Perhaps a more direct way to invest in a socially responsible invest directly in the stocks or bonds of solid, financially-sound companies that appeal to your values.
There is a misconception that when you invest in shares of individual companies you are increasing your risk because you are reducing the number of companies you are investing in, concentrating risk to a few investments. This is only true if you don’t do your research and invest in companies that are not financially, socially and ethically sound.

There are now approximately 26 ETFs to choose from and even though they only account for about 1 percent of the total assets invested in SRI, their assets have grown 225% since 2007, the fastest of any registered investment product.

To begin your search, several publications release annual lists of the top SRI companies. If you simply don’t have time or want to do the research, ETFs are a great option or you can subscribe to New Paradigm Wealth bi-monthly newsletter that offers investment ideas, trends and notable companies to watch.

Many mutual funds just can’t beat a simple, static product that tracks an index, like exchange-traded funds (ETFs). One of the first SRI indexes, the FTSE KLD 400 that began in 1990, has continued to perform competitively -with returns of 9.51% from inception through December 31, 2009, compared with 8.66% for the S&P 500 over that same period. For a fraction of the cost of investing in a mutual fund, you can simply buy shares of an ETF that tracks the FTSE KLD 400 and do just as well if not better.

Alternative investments include hedge funds, venture capital funds, private equity funds, property funds and other unregistered limited partnerships or limited liability companies that are typically available only to accredited and high net worth investors. In other words, these are the investments that usually have high minimum initial investment requirement of $50,000 or more that are only available to a wealthy few.

Mutual funds, generally, tend to be expensive. Many mutual fund companies charge ongoing fees in addition to fees to purchase or sell shares.

There are several global trends extending into 2011 that will help drive investment in the SRI space such as the positive outlook for global economic cycle (coming out of a global recession), demographic shifts (booming population growth in Asia and aging population in U.S.), new technology, climate change, among other things, which all play a factor in determining where money flows.

This area of SRI has skyrocketed since 2008 with 610% increase in managed assets driven by an increasing interest in clean tech and renewable energy.
COMMUNITY INVESTING: Community Development Financial Institutions (” CDFIs”).
Community Development Financial Institutions are made up of: community development banks, community development credit unions, community development loan funds and community development venture capital funds. Each of these is a different type of lender that makes capital available to individuals or small businesses in underserved communities.

Through weekly posts and a bi-monthly newsletter, New Paradigm Wealth hopes to guide investors through SRI options that make sense right now. On our website, I’ve listed several resources that will provide guidance in making wise investment choices as a socially responsible investor.

Assets in community investing institutions have risen more than 60% since 2007.
Today, many of these institutions are reaching out to their targeted clientele online. Kiva.org is one such organization that specializes in providing micro loans to entrepreneurs in developing parts of the world. The repayment rate is 98.99% and interest rates vary but are more competitive than a bank savings rate.

These are not necessarily for everyone but unlike mutual funds, hedge funds employ managers that have the flexibility to buy and sell using investment techniques and strategies that are generally unavailable or even prohibited by mutual fund companies because of regulatory constraints.

GLOBAL TRENDS.

ALTERNATIVE INVESTMENTS.

Greater flexibility generally translates to a better ability to adjust to differing market conditions and the potential for higher returns.

Community investing involves the direct investment of capital to underserved members of communities through local community banks/lenders (also called collectively, “Community Development Financial Institutions” or “CDFIs”). Community investing can also be accomplished through venture capital funding.

There are now over 250 mutual funds that are specifically designed to align investments with certain social values. Some mutual fund companies are exclusively focused in SRI, such as Calvert, Domini, PAX World, Ariel, Sentinel, Winslow, among others, while more mainstream mutual fund companies like Vanguard, Neuberger Berman, Gabelli, Legg Mason, and Dreyfus, to name a few, have one or more investment products that address certain social concerns, but SRI is not their primary focus.

BONDS and stocks.

Now is the time to align your values with investment choices that are consistent with what you believe in, what you care about, what matters most to you.

Specifically, green investing related to clean technology and renewable energy is one of the most dominant themes in 2011 driving the increased investments in SRI and in particular SRI alternative investments (ie hedge funds, private placements).
To make smart choices about where to put your money, it’s a good idea to take a step back from the different investment vehicles available and take a look at the big picture. What changes are driving investments in the sectors, and specifically, companies that are most likely to perform well in the socially responsible space?

WHERE TO FROM HERE?

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