Socially responsible investing (Part 3): returns, fees and investment options

 

Can investing in “bad stuff” pay off?

The short answer is “yes, sometimes.”  Sectors avoided by many ethical investors can have periods of strong returns.  Tobacco is the most widely discussed sector – it has been bad for your health as a consumer but great as an investment.  Despite tobacco consumption shrinking globally and large law suit settlements, tobacco stocks have delivered total returns of 13% annualised since 1997. This is quite remarkable, especially given the overall market has returned 4.5% over the same period.¹

But outperformance by the likes of defence, casinos and armaments (let’s call these “bad stocks”) is not guaranteed.  If you want to invest in “bad stocks”, your first option is to construct a diversified portfolio of directly held stocks. Motif (a US investment website platform) created a model 20 stock portfolio based around the seven deadly sins –  which includes junk food, tobacco and alcohol stocks.  It has returned only a little more than half of the S&P500 over the last year: