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How UC Berkeley MBAs Beat the Market with a Socially Responsible Fund

How do you balance your principles with your quarterly performance?

That question has puzzled investors since day one. On one hand, money managers want to associate with good corporate citizens. And a roster full of do-gooders is attractive to potential backers. On the other, managers are expected to deliver a certain return. And even the best intentions can’t overcome losses for long.

Occasionally, there are funds that can strike this elusive balance. And you’ll find one of them run by students at the University of California-Berkeley Haas School of Business. Known as the Haas Socially Responsible Investment Fund (HSRIF), this student-run vehicle has grown to $2 million since 2011. And the school hopes to eclipse the $15 million dollar mark by 2020.

The fund began when Haas alumni collected $1.1 million to create a socially responsible portfolio. The idea, according to alum Charlie Michaels, was to use the fund to “make a difference in this field, which used to be called business ethics, now corporate social responsibility.” Thanks to the students, Haas has proven that ethics and earnings can go hand-in-hand. The HSRIF has beaten the market average by 5% during its existence, while nearly doubling in size. As a result, HSRIF alumni now populate firms like Cambridge Associates and the Calvert Social Investment Foundation.

So what’s the secret behind HSRIF’s success? For starters, the fund is comprised of socially active blue chips, such as Google and Starbucks. As part of earning credits, 13 Haas students mimic the routines of fund managers in managing the HSRIF, according to The Guardian:

“…students spend time on financial terminals, researching, investigating and analyzing risks, controversies, market trends, rankings and best practices. Unlike traditional approaches to investment management, each principal only tracks between one and three companies, deeply monitoring the behaviour and management decisions which impact each organization’s environmental practices, human rights records, labour rights, community and government relations.”

Students meet weekly regarding the fund’s operations. During these sessions, they examine investment proposals heavy on ESG (environmental social governance) indicators before voting as a group on which holdings to add or remove.  Tom Garland, one of HSRIF’s current principals, argues that their process is much different than most investment firms. “It’s much less spreadsheet-driven. You sit down and have a much more qualitative discussion about a company, what makes it tick, what drives this company’s decision-making.”

Unlike most firms, Haas Socially Responsible Investment Fund must contend with 50% turnover in its ranks due to graduation. As a result, it experiences swings ranging between a 6.6% loss to a 30.2% gain. However, the students emphasize continuity in philosophy in both recruiting and onboarding. The outgoing principals look for diversity in “viewpoint and experience” in their replacements. And their training program is “designed to ensure that incoming students understand the fund’s values, investment culture and view of corporate social responsibility” according to The Guardian.

Despite its socially conscious underpinnings, the Haas Socially Responsible Investment Fund is still a business. But it is one that attempts to strike a balance, according to Center for Responsible Business Faculty Director Kellie McElhaney. “When it comes to socially responsible investing, many people try to lead with their heart, versus investing with knowledge of social responsibility,” she said. “At Haas, we are training hard-core investment folks, who also understand what it really means to look at ESG indicators.”

Source: The Guardian