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Sizing Up Socially Responsible Funds

The pros and cons of values-based investing.

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Advocates of socially responsible investing (SRI) sometimes draw connections between social screening and investment performance. In theory anyway, the connection seems tenable. If a company's business model relies on environmentally destructive behavior, say, or the sale of stigmatized or heavily regulated products such as tobacco or firearms, it seems reasonable to think those practices might eventually ding the bottom line. Conversely, goes the argument, firms that steer clear of such verboten products or practices will likely make the superior investment--as will the mutual funds that invest in them.

But is this line of reasoning borne out by the evidence? Not exactly.

Consider the case of Philip Morris, which now goes by the name  Altria Group  (MO). Though heavily exposed to tobacco litigation, the firm still managed to generate $10.6 billion in free cash flow last year. And, relatively unhindered by the social stigma that attaches to cigarettes in the United States, the company's global operation continues to ramp up sales and profits. Considered in purely financial (as opposed to social) terms, therefore, Altria looks like a pretty good investment.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.