First Socially Responsible Investing Portfolio Devoted to Diversity Launched

by Bill Baue. SocialFunds.com July 31, 2006.

Minority-owned Creative Investment Research conceived of the portfolio to promote corporate diversity while targeting women and minority investors for economic empowerment.

SocialFunds.com -- Socially responsible investing (SRI) has a long history of promoting corporate diversity through positive screens and shareowner advocacy--for example by filing resolutions for more race and gender diversity on the board or a commitment to sexual orientation non-discrimination. However, there has not been an SRI portfolio exclusively focusing on diversity until last week's launch of the Diversity Index Portfolio by Creative Investment Research, a Minneapolis-based minority owned social investment advisory firm. The portfolio consists of between 40 to 60 large-cap US companies with strong diversity performance.

"While other socially responsible funds may consider workforce diversity as one factor among many, the Creative Investment Research Diversity Index Portfolio makes it the top selection criterion," explains Bill Cunningham, CEO of Creative Investment Research and the fund's investment advisor. "Companies in the Portfolio all have a proven track record in four key measures of diversity: human capital, CEO commitment, corporate communications, and supplier diversity. We research hundreds of companies each year, using data from multiple public sources including NAACP, Urban League, Operation PUSH, and others, and rank them on financial and diversity-related performance," Mr. Cunningham told SocialFunds.com.

Mr. Cunningham contends that strong diversity performance can correlate with strong financial performance. For example, back-testing of a model of the Diversity Portfolio resulted in significant outperformance, generating 11.35 percent returns over the one-year period ending July 25, 2006, compared to 5.02 percent for the S&P 500.

Bolstering this contention is the strong performance of the 2006 DiversityInc Top 50 Companies for Diversity Index, which measures the financial performance of this year's lists of the strongest corporate diversity performers as determined by DiversityInc, the field's foremost publication. Over a ten-year period, this index outperformed the S&P 500 by 24.8 percent and the Nasdaq by 28.2 percent.

The portfolio's top five holdings include Harris (ticker: HRS), BellSouth (BLS), Ikon Office Solutions (IKN), AT&T (T), and Embarq (EQ). Other holdings include Bank of America (BAC), Citigroup (C), Coca-Cola (KO), Ford (F), Procter & Gamble (PG), and Sprint (FON). The portfolio's exclusive focus on diversity (it applies no other SRI criteria) means it may contain companies screened by other SRI funds. For example, the CREF Social Choice Account, the largest SRI retail fund in the US with $8 billion in assets, recently dumped Coke when it was deleted for environmental, social, and governance reasons from the index upon which it is based, the KLD Broad Market Social Index (BMSI).

"While better than average on the diversity front, these firms are not perfect," admits Mr. Cunningham. "Creative Investment Research monitors the portfolio to maximize social return through advocacy, education, and consultation. I  am a Quaker, so I believe in being proactive and collaborative," he adds. "We think selecting these companies based on diversity may allow for advocacy concerning other SRI issues--hopefully, we can make these firms better."

The very structure of the portfolio may help facilitate this engagement. The portfolio is essentially a basket of companies chosen by Creative Investment Research for investment through FOLIOfn, an electronic investing platform.

"One of the great things about Folio is that it allows you to vote proxies, since shareholders are actually holding shares of stock in the individual companies directly, and not through a mutual fund company," says Mr. Cunningham. "We hope to educate shareholders about diversity issues and get them to advocate, too."

With an expense ratio ranging from 0.6 to 0.8 percent, the portfolio specifically seeks to attract women and minority investors, who typically have less investing experience and less money, according to Mr. Cunningham. In this way, it supports the economic empowerment of classes of people who have been historically disenfranchised. This dynamic at the individual investor level coincides with the goal of the portfolio at the corporate level of promoting social justice.

"Almost everyone agrees that equal opportunity is a laudable goal, and it has been codified in many laws in the U.S. Consequently, many people think the best way to achieve equal opportunity is a merit-based system that is completely colorblind," says Mr. Cunningham. "This is certainly the ideal, and one that we hope will be a viable solution in America someday. However, it makes one fatal assumption: that the history of injustice is no longer relevant to today's society," he adds. "Sadly, this is not true. Consequently, a colorblind outlook strikes us as hopelessly out of touch with the reality of life in the United States and the world," Mr. Cunningham concludes. "Fortunately, there are solutions, and we believe The Creative Investment Research Diversity Portfolio can be a positive force for social change."


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