Ethical investing: A feel-good way to lose money

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A couple of weeks ago, I outlined the bullish case for investing in Monsanto Co. What wasn't there to like? Here was a company making genetically modified seeds designed to boost harvests, which is the perfect play on a rising global population and the urgent need to feed more people.

But many readers didn't see it that way. Anyone who dislikes the idea of genetically modified organisms (or GMO) was appalled by the thought of investing in a company that made and marketed these seeds.

For these investors, Monsanto was a stock to loath, not love – and their response to my article tapped into what is generally called socially responsible investing (SRI), or the desire to invest only in companies that respect the environment, treat employees well and make the world a better place.

It sounds nice. Heck, it is nice. But socially responsible investing isn't the best approach to building a sound investment portfolio, unless you see your savings as something akin to charity.

Companies exist to make money, and as much of it as they can. Apple Inc., beloved by gadget enthusiasts worldwide, earned more than $8-billion (U.S.) in its fiscal fourth quarter, with gross margins of more than 40 per cent.

Your investment portfolio should operate on a similar premise – maximizing returns. The problem with SRI, though, is that you limit your universe of stocks. And this limit simply cannot do a better job of building wealth.

I've often thought of it in terms of fantasy sports team: If you were to pick, say, a fantasy baseball team, would you do better by limiting yourself only to your home-town heroes instead of the best players at the position? Probably not.

This isn't to say that companies widely regarded as socially responsible can't perform well, just as your local guys aren't necessarily slouches. But a smaller pool of opportunities means you could be leaving the best picks on the table.

Some observers believe that generally reviled companies tend to trade at cheaper valuations, boosting their long-term performance.

There is some evidence to back this up. U.S. tobacco giant Altria Group Inc. – yes, they sell death in the form of cigarettes – has returned 488 per cent over the past decade, after including dividends. That is about five-times the gain of the benchmark S&P 500 over the same period. Monsanto has performed even better, rising nearly 1,100 per cent.

In Canada, the Jantzi Social Index, which is comprised of 60 Canadian stocks deemed socially responsible – including oil producer Suncor Energy Inc., coal producer Teck Resources Ltd and a smattering of pipelines and gold producers – has gained 97 per cent over the past decade.

That might sound okay, but it is about 60 percentage points below the S&P/TSX 60 index and the S&P/TSX composite index.

The biggest argument in favour of socially responsible investing is simple: You might not care about getting the best return possible. But in that case, there are far better things you can do with your money – such as giving it away to a good cause.

READERS: Have you found any ethical stocks or funds that outperform the market? How much "ethical" weight does your portfolio have? Trade your shots in the comments.