Some bonds are more ethical than others for individuals, says Charles Sandmel, a veteran of the municipal bond market. Mr. Sandmel, a certified financial planner in Brookline, Mass., and representative of First Affirmative Financial Network, shared his insights about bonds and socially screened stocks on a Monitor webcast. Here are edited excerpts of that conversation with the Monitor's Laurent Belsie:
Why has it been such a turbulent quarter?
Sandmel: You have forces pushing stocks in both the upward and downward directions. You have a strong economy if you look at the GDP numbers. You have relatively low unemployment if you look at the unemployment rate. On the other end, you have wildly volatile stock prices, you have natural disasters in the Gulf [of Mexico]; you have fear of higher interest rates while the Fed keeps raising interest rates; you have questions about how strong the housing market is. So I don't see things getting any calmer over the next three months to a year.
Should investors head for safety?
Most of what I tell clients to do is to diversify their portfolios to make sure that they are not betting on one series of news events. For me, that's the most important part of having a stable and steady gain in a market.
Are there special dangers now for the ethical investor?
I think so. The last two or three years have been a perfect storm for ethical investors in that the market leaders have been in the things that most of them avoid, such as energy. If you look at the last 12 months, the Dow Jones is up less than 1 percent and so is the S&P. The energy sector is up 43 percent. So if you're not buying Big Oil because of the pollution problems, you're losing out on a lot of that income at this point in the game. So investors who are screening their portfolios need to find ways to work around the current outperformance of the things that they're avoiding.
What socially screened mutual funds do you like?
Two of the most interesting funds I've been working with recently are Portfolio 21 and Winslow Green Growth. Portfolio 21 is an international fund. It's about 60 percent foreign, about 30-something percent US, and the rest in cash or bonds. Their approach is to look for companies that are on the cutting edge of sustainable technology or are managing their own efforts in a very sustainable fashion. Winslow Green Growth is looking for smaller, more nimble companies that are on the cutting edge of technology, particularly in the area of energy efficiency, energy saving, and alternative energy.
Is it time to get back into bonds?
If you need bonds in your portfolio - and I think everybody does because they provide current income, preserve capital, and offset some of the volatility in stocks - you ought to be buying bonds.
Do you stick to short maturities?
My absolute time horizon is between 10 and 15 years for clients. And on average I like it to be around five years. But I don't concentrate in five-year [bonds] because there are different things happening.... I would rather be either in a ladder of bonds maturing this year, next year and four or five after, or a "barbell" with bonds due next year and 10 years out.
What bond funds do you like?
There are a number of very good bond funds in the social arena, but only one on the municipal side. And that one is quite small and it's really only suitable for California-based investors because the interest is exempt from the very high California income tax. On the other hand, you have things like the Calvert Social Bond Fund, which holds almost $300 million worth of corporates and agencies and taxable municipals and has returned almost 4 percent this year.
What makes some municipal bonds ethical?
You may be able to embrace an appropriate technology or an appropriate use. For example: Florida Power sold some bonds to finance a wind-generation facility. So did Energy Northwest in the municipal area. And the Nebraska Public Power District has just sold bonds to finance a wind turbine farm out in Nebraska. I had a client, who's since deceased, who bought nothing but school bonds and library bonds.
What makes bonds unethical?
Specific people [say]: "Don't put me in Treasuries. I want to avoid them because I see them as war bonds." I have other clients who say: "I don't consider Treasuries war bonds." The defense budget is only 15 percent of the federal government anyway. And there's an awful lot of infrastructure and other good things that are being financed with Treasuries. Along those lines, there's a mutual fund that has been looking at sovereign government bonds of the Republic of Costa Rica because Costa Rica doesn't have a standing army.
And it has an impact?
Going to the companies that are borrowing gives you a much greater chance to engage them on your social issues than simply buying their stock in the secondary market, because the bond-fund manager can go and say: "I'm doing my due diligence on your company. You have an enormous number of pollution suits against you and 20 Superfund sites. What is that going to do to your cash flow and other things?" And unless she gets an acceptable answer, she's not going to buy it. But she can pick the companies that are doing good things.
â€¢ Watch the video at: www.csmonitor.com/ethicalinvesting