I recently asked someone if they were invested in private prisons (private prison investing), and they replied, “I don’t think so.” When I followed up by asking if they invested in mutual funds in their 401(k) or Roth IRA, their expression changed. This reaction is not uncommon; many investors aren’t fully aware of what companies their mutual funds hold. In February 25, 2021, I wrote Are you unknowingly invested in private prisons? This is an update to that article.
However, some people (maybe you) worry about missing out on potential returns if they exclude certain sectors or companies. Investment funds manager make choices about what to include in their portfolios, and the wisdom of these decisions can only be judged in hindsight.
If you are concerned about investing in private prisons, there are resources available to help identify funds that support or avoid the industry. As a values-aligned investment advisor, I use tools like the Morningstar Sustainability Ratings and YourStake. A great publicly available resource is Prison Free Funds provided by As You Sow.
The term “Prison Free” may mean different things to different people. As You Sow’s Prison Free Funds provides a range, with the lowest grades going to private prison operators. They then calculate the percentage of holdings of support companies including suppliers of food, laundry, IT, power, banking, and other services and products needed to run the prison industry and the militarization of borders and immigration policing.” The “Prison Free Funds” homepage shows you how it refines the definition under the “The prison and border industries” heading, with details of the scoring rubric and methodology on the “how it works” page.
Further down the page you will see a heading “Index Funds”. An index fund simply takes a research company’s index definition and turns it into a fund. As You Sow highlights that most of the indexes get an “F”. There is only one “A”. It’s important to note that As You Sow is not an investment adviser and is not making an investment recommendation. It simply provides assessments based on their criteria.
In the next heading down, you will see “Target Date Funds” which has become the default choice for many employer-sponsored plans.
Many employer-sponsored retirement plans default employees into target date funds, which adjust their investment mix over time based on the investor’s retirement horizon. Note that almost all of the “Fund Families” listed score an “F”. Some of the fund families use index funds and some do not. The best fund only scores a “C”. You should have more investment choices in your plan beyond the target date funds, which hopefully provides an opportunity for you to invest in a fund that more closely matches your values.
You can run those choices through their screener to find out or learn about “Top Scoring Funds,” Be sure to click the “Get More Funds” button, as multiple share classes of the same fund may be listed. For example, the “Calvert Emerging Markets Equity Fund” has different share classes, each designed to cover different costs associated with managing the fund. These might include upfront fees (A shares), institutional fees, or fees specific to retirement plans.
Most of the clients I work with aren’t single-issue voters; they care about multiple issues that matter to you. As You Sow’s Invest Your Values page allows you to look up even more values.
Can you retire without private prison investing?
Through YourStake (YS), a values-based research company, we can analyze investments from an investment adviser’s perspective. While YS is not an advisory firm, they offer their service to investment advisers who want to help their clients align their values with their investing. First, I established a definition of private prison values using their values set (yours may differ):
• Prison Operators: Companies that maintain incarceration and detention facilities receive a score of 100% for being exposed to the prison industry. Companies not involved in these activities receive a score of 0%.
• Prison Funders: Corporations that invest in, or own debt with prison operators receive a score of 100% for prison funding involvement.
• Prison Industry Exposure: Companies that maintain, supply, or otherwise enable incarceration and detention facilities, provide services in facilities, or assist with supervision and monitoring, in any capacity, receive a score of 100% for being exposed to the prison industry. Companies not involved in any of these activities receive a score of 0%.
• Prison Labor Involvement: Corporations that use prison labor, either directly or as part of their supply chain receive a score of 100% for prison labor involvement. Corporations are flagged if there is recent, publicly available evidence of support for prison labor.
• Prison Suppliers: Companies that supply incarceration and detention facilities receive a score of 100% for being exposed to the prison industry. Companies not involved in these activities receive a score of 0%.
Now, I selected the following indexes: MSCI ACWI VS. the MSCI KLD 400 (KLD). The MSCI ACWI captures large and mid-cap representation across Developed Markets (DM) and Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set. The KLD. It is designed to provide exposure to the common stocks of companies that MSCI determines to have positive environmental, social, and corporate governance characteristics. However, this is not explicitly private prison exposure. As you can’t directly invest in an index, I selected the iShares MSCI ACWI and the iShares MSCI KLD 400 Social ETF which replicate the pure index.
Those are compared to YourStake’s values optimizer (we’ll call it YSO Prison). YourStake optimizes portfolios based on the MSCI ACWI Index, risk tolerance (I used Aggressive) and the previously defined Prison Values. YourStake removes companies from consideration from the MSCI ACWI index and then seeks to create a “best fit” portfolio from the remaining companies.
While I suggest five different ways for you to evaluate your investments, Risk adjusted, Values adjusted, Fee adjusted, Tax adjusted and Stress adjusted, we’ll look at values and the hypothetical growth you might have experienced, had you been invested in these options.
Can you retire without private prison investing?
Through YourStake a values based research company we can analyze investments from an investment adviser’s perspective. While YSO is not an investment adviser, they offer their service to investment advisers who want to help their clients align their values with their investing.
First, I established a definition of private prison values using their values set (yours may differ):
• Prison Operators: Companies that maintain incarceration and detention facilities receive a score of 100% for being exposed to the prison industry. Companies not involved in these activities receive a score of 0%.
• Prison Funders: Corporations that invest in, or own debt with prison operators receive a score of 100% for prison funding involvement.
• Prison Industry Exposure: Companies that maintain, supply, or otherwise enable incarceration and detention facilities, provide services in facilities, or assist with supervision and monitoring, in any capacity, receive a score of 100% for being exposed to the prison industry. Companies not involved in any of these activities receive a score of 0%.
• Prison Labor Involvement: Corporations that use prison labor, either directly or as part of their supply chain receive a score of 100% for prison labor involvement. Corporations are flagged if there is recent, publicly available evidence of support for prison labor.
• Prison Suppliers: Companies that supply incarceration and detention facilities receive a score of 100% for being exposed to the prison industry. Companies not involved in these activities receive a score of 0%.
Now, I selected the following indexes: MSCI ACWI VS. the MSCI KLD 400 (KLD). The MSCI ACWI captures large and mid cap representation across Developed Markets (DM) and Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set. The KLD. It is designed to provide exposure to the common stocks of companies that MSCI determines to have positive environmental, social, and corporate governance characteristics. However, not explicitly private prison exposure. As you can’t directly invest in an index, I selected the iShares MSCI ACWI and the iShares MSCI KLD 400 Social ETF which replicate the pure index.
Those are compared to YourStake’s values optimizer (we’ll call it YSO Prison). YourStake optimizes portfolios based on the MSCI ACWI Index, risk tolerance, I used Aggressive and the previously defined Prison values. YourStake removes companies from consideration from the MSCI ACWI index and then seeks to create a best fit portfolio from the remaining companies.
While I suggest five different ways for you to evaluate your investments, Risk adjusted, Values adjusted, Fee adjusted, Tax adjusted and Stress adjusted, we’ll look at values and the hypothetical growth you would have had you been invested in these options.
As you might expect, from a values perspective the KLD and the YSO Prison were the best. As the YSO Prison was built specifically to align with Private Prison values, it reached a 100% score.
After a 10-year hypothetical “look back”, the iShares MSCI ACWI gained 156.4%, KLD gained a 249.2% increase in value, the and the YSO Prison an impressive 447.2%. The returns show that the the KLD and YSO Prison were clear winners. That said, the YSO was about 200 percentage points better. However, I believe the biggest take away from this data is that the higher values aligned portfolios created the greatest return on investment*.
Conclusion
Private prison investing inside of retirement portfolios is rarely discussed, especially inside of target date mutual funds. You have seen that aligning with your values may also increase your returns. In my experience, people who align best to their values incorporated into their strategy tend not to make lots of short-term decisions regarding their investments. This could be especially true if you feel that making money based on the incarceration of others is not how you’d like to fund your retirement.
This approach may also check many other boxes regarding evaluating your investments. YourStake is not an investment adviser but provides its services through investment advisors who choose to use their research. This article shows that should you choose to pass through a mutual fund or exchange, traded fund, or take the precision of a direct indexing approach, you can potentially have superior returns aligned with your anti-private prison investing values.
Read the full article here
