April 9, 2003

By Michael Stoll

BATTLE-WEARY antiwar protesters who want to go beyond writing letters to the editor and attending teach-ins and marches might be able to learn something from investment brokers.

Over the long haul, some say, pulling personal savings and equity investments out of companies that build weapons systems might send just as strong a message as a month of taking to the streets.

Even the most dedicated activists may not realize their mutual and pension funds, and the banks they use, directly provide start-up funds for arms factories. If you're upset with the war, business ethicists say, why not hit the military-industrial complex where it hurts and put your hard-earned money elsewhere?

You don't have to be wealthy to set up your own personal economic-sanctions regimen. Anyone with a few hundred dollars stashed away can start by investing in socially responsible mutual or pension funds that screen out military stocks. You could also sell any federal government bonds, which help the U.S. Treasury Department finance the war. And you could open a checking account with a small community bank that doesn't loan money to defense contractors.

War is bad business

Thirty-two years ago Pax World Funds, in Portsmouth, N.H., offered the first alternative weapons-free investment for opponents of the Vietnam War. Now there are more than 230 socially responsible investment funds, or SRIs, with roughly $2.3 trillion in assets. Most, but not all, eschew weapons manufacturers as a matter of course. Since the fighting started in Iraq three weeks ago, some fund managers have even begun to cater to antiwar investors, publicly denouncing the war while highlighting their pacifist financial products.

In fact, an extraordinary thing happened on Wall Street during the long drumroll preceding the invasion of Iraq. The markets did not shoot up as we drifted into conflict but swung up one day and down the next.

Instead, mainstream economic thought on war has shifted. During World War II just about everyone agreed that military spending helped lift the country out of the depression. But today war isn't necessarily seen as productive. Financial analysts are about evenly split on the question of whether military spending will spur growth if the overall economy is already weak.

One would have expected the defense industry, in particular, to be doing better under the promilitary policies of President George W. Bush and the Republican-led Congress. But the Amex Defense Index, which tracks large military manufacturers, has seesawed as wildly as the rest of the stock market and is down 28 percent from a year ago.

"Even though in the last year we've had hundreds of billions thrown at the defense industry, if a year ago you'd invested in these companies, you'd have lost a lot of money," said Richard Torgerson, a Maryland broker and president of the research group Nuclear-Free America.

Torgerson said large military firms have to borrow huge quantities of cash to finance risky, experimental weapons systems that might fail or run over budget, which makes them bad investments from a purely financial standpoint.

Socially responsible fund managers feel vindicated by the failures in the defense sector.

"In the early years of SRIs, people said you have to give something up in terms of return, but I think most people have abandoned that," said Jerome Dodson, president of Parnassus Investments, which is based in San Francisco. "I've found a social screen is certainly no barrier to getting above-average returns."

With the panoply of competitive financial tools available nowadays, there's no reason to invest in anything you're not proud of. You can pick from a number of strategies for ridding your portfolio of Pentagon profit based on your own comfort level. Here are three alternatives:

Strategy one: pragmatism

A growing number of traditional stock brokers and investment advisors are looking at socially responsible stock funds these days, and for good reason: the SRIs are often outperforming other funds (see "Principles and Profits," page 25).

Though a typical SRI requires an initial payment of $2,000, several accept as little as $250. But you have to look carefully if you want to be sure you're avoiding defense contractors.

Most SRIs exclude stock in the top companies that make missiles, tanks, jet fighters, machine guns, etc. – companies like Lockheed Martin, Honeywell, General Electric, General Dynamics, Textron, Halliburton, United Technologies, Rockwell Collins, Northrop Grumman, Raytheon, Boeing, and ITT Industries.

But there are hundreds of other companies that do business with the Pentagon. Don't assume that just because a fund calls itself socially responsible that it screens out military investments. IPS Millennium Fund, in Knoxville, Tenn., for example, openly says it doesn't have a military screen, asserting that countries have the right to self-defense.

Some firms simply say nothing about the military. Dreyfus's $550 million Premier Third Century Fund A screens for the environment, occupational health and safety, consumer protection, and equal employment opportunity. But with the exception of tobacco firms, Dreyfus may invest in the least bad companies in any industry.

Parnassus Investments, which offers four SRI funds worth a total of $700 million that have been among the best-performing mutual funds of any kind, does not invest in any of the top 100 weapons contractors. But there is a caveat: the company has no policy excluding subcontractors or semiconductor firms that may do significant defense contracting.

Boston's Walden Asset Management seems stricter. It excludes only the top 30 military contractors and any company that derives more than 5 percent of revenue from weapons manufacturing. But Walden uses subjective criteria as well. It looks at all "significant" weapons contracts. "Say they have 1 percent, but that 1 percent is in land mines," said Heidi Soumerai, Walden's director of social research. "Then we rule them out."

On the Web a good place to start researching SRIs is the GreenMoney Journal site (www.greenmoneyjournal.com), which provides a list of all of the major SRI funds and many other financial institutions. The industry trade group Social Investment Forum (www.socialinvest.org) has a detailed list of funds and the social screens they employ. For late-breaking industry news, visit the SRI World Group network of Web sites (www.socialfunds.com).

Strategy two: purism

Some investors don't feel comfortable just sifting out the large military manufacturers. While most SRIs shun the big guns, they often invest in weapons subcontractors, which may be equally troublesome to their clientele.

To further complicate things, there's nary a public company in Silicon Valley that is 100 percent free from links to the Department of Defense. Otherwise-wholesome technology investments are tainted by computer systems whose applications make fighting forces at home and in allied countries so efficient and lethal.

There are all sorts of gray areas. Should you punish the makers of night-vision goggles with the same vigor as the makers of cluster bombs?

"In general the question is how deep it goes," Social Investment Forum president Tim Smith said. "What if you're selling cloth or uniforms?"

At Pax World Funds, Maryanne Murphy, a vice president, said her firm has a zero-tolerance policy toward weapons manufacturers. Pax also limits investments to companies that do less than 5 percent of their business with the Department of Defense.

"We're here for investors who don't want to profit from war," Murphy said.

Amy Domini, founder of Domini Social Investments, acknowledged that it's impossible to completely avoid any military connections. But her fund won't invest in any company that derives more than 2 percent of its revenue from military weapons. It also avoids companies that are so big that even a small percentage makes them a major arms contractor. General Electric, for example, reported in 1998 that sales of defense-related aircraft engines represented 1 percent of the company's revenues, or $1.005 billion. That made G.E. the 13th-largest defense contractor in the United States.

Like Pax World Funds, Domini has come out strongly against the war.

"I do think that the war highlights for people that the way you invest does in fact matter," Domini said. "We as a nation are making a decision to lay off teachers and firefighters and police officers and EMS technicians in order to buy more bombs. This investment in bombs is going to have a profound impact on the future of America."

MMA Praxis Mutual Funds, in Goshen, Ind., which was started in 1994 by Mennonites, claims to have among the strictest antimilitary screens. It avoids "companies with product and service contracts that aid military expansion or promote war and violence." Among those are General Motors, BFGoodrich Tires, Ericsson, and even toy company Hasbro, maker of G.I. Joe and other military-themed toys.

Government securities may seem like a nonviolent, safe way to invest, but the government can use the money you lend it through standard treasury bonds to finance foreign interventions. When SRI managers do buy government bonds, they tend to invest in cities, counties, and states or specific federal agencies that have no connection to the military. Investing in local government also makes sense at a time when cities and states are stuck with providing essential services the federal government won't pay for.

Then there's banking. Many large banks make loans to corporations involved in military manufacturing or services. In fact, in order to qualify for federal deposit insurance, banks are required to lend to any person or company deemed credit-worthy, including weapons makers.

Because a smaller neighborhood bank typically doesn't have the cash to fund the development of the Joint Strike Fighter, you can use your ATM card there with a lot more peace of mind.

"I bank the butcher, the baker, and the candlestick maker," said Brian Garrett, president and CEO of Oakland's Community Bank of the Bay. "We do what any other bank does, just we hug and kiss you a little better."

San Francisco is home to seven consumer banks with less than $1 billion in capital each – well below the necessary threshold, experts say, to be significant lenders to the defense industry. From smallest to largest they are Mission National Bank, Sequoia National Bank, California Pacific Bank, National American Bank, American California Bank, Liberty Bank, Trans Pacific National Bank, Oceanic Bank, and Bank of the Orient.

A comprehensive database of banks listed by city and ranked by size can be found online at www.fdic.gov.

Strategy three: quasi philanthropy

And if you're not satisfied just passively sifting military entanglements out of your portfolio? A handful of financial institutions promise to make your money work for political change.

If you want to be sure your credit card company is working for peace, so far there is only one game in town: Working Assets, which offers a credit card and long-distance and wireless telephone service. The company donates a percentage of each monthly bill to progressive causes.

If you want to see your money aiding worthy projects in your community, nonprofit "social venture capital" lenders offer but do not guarantee an annual rate of return typically up to 3 percent. The money is invested in low-income housing, community facilities, and individual lines of credit in poor communities.

Venture Collective, an Oakland group launched last fall, is pushing to create a fund to help independent media projects. Instead of complaining about biased corporate-media coverage of the war, the fund seeks to circumvent the better-financed news sources.

"We're drawing on the same social networks that have been getting people out in the streets protesting the war," executive director Brad deGraf said. "I think people are looking for constructive ways to build a better world, and there aren't a lot of options for people who just have a hundred bucks."

David Zebker, an accountant who lives in the Tenderloin, already had $50,000 invested in a three-year CD with Chicago's Shore Bank, the nation's oldest community development bank. He also owns some stocks and has screened out most military investments. Recently he invested a small sum in the Northern California Community Loan Fund, which lends to community social service organizations and housing programs and returns up to 2.5 percent. "That used to be below market, but these days it's looking pretty good," said Peter Stern, the fund's development director. The fund has made 175 loans, worth $25 million, without a single default, making it look like a sure bet for slow and steady income growth that makes a contribution to the community.

"I think the fact that I have most of my cash in a CD that does small community loans does make a difference," Zebker said. "I have a friend who has been arrested four times since we started bombing Iraq. I admire him, but I won't do what he does."

Lists of community investment organizations, credit unions, and other funds and services can be found online at www.communityinvest.org. Also go to Working Assets' Web site (www.workingassets.org).