What should Bill Gates do?

Proponents of "socially responsible investing" claim that the Bill and Melinda Gates Foundation could change the world by adopting mission investing. Only the realities of capital markets and the stark truth about social investing interfere with that equation, says Jon Entine, an adjunct fellow at the American Enterprise Institute.

U.S. stocks have an aggregate capitalisation of $16 trillion. With all due respect to even the Gates Foundation's billions, its funds, spread over many hundreds of stocks, have no effect on the market value of any single stock, says Entine. Selling a "bad" company, he explains, would have no more impact than scooping a thimble full of water out of the deep end of the pool; it goes back in the shallow end when the person on the other side of that transaction buys it,

The market has proved remarkably efficient in determining what marks a corporation as "good." Customers and investors vote on that every day, says Entine:

A recent Wharton study calculated that funds that layer on ideological screens often perform worse than the general market by about 31 basis points a year, a huge discrepancy.

Domini Social Equity Index, considered the gold standard of social index funds, rates a lacklustre C- in Business Week's latest ratings.

Calvert's Social Index Fund has lost 1.82 per cent since its inception in 2000, ranking it in the bottom 15 per cent of all funds.

Now Bill and Melinda Gates are being asked to turn over investment for billions of dollars to these same social researchers?

The use of social criteria may be fine for affluent investors or activists who gamble their own money and assume the extra risk to achieve their perceived political goals, but the Gates Foundation has set a higher standard. Let's hope it keeps it, says Entine.

Source: Jon Entine, What Should Bill Gates Do? Wall Street Journal, January 26, 2007.

For text: http://online.wsj.com/article/SB116978427203688710.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 30 January 2007