(FORTUNE Magazine) – THE LATEST FUSS over college-endowment investments in South Africa raises anew an old question: What happens to performance when political and moral considerations are factored into investment decisions? Most portfolio managers shudder at the thought. But a look at the performance of the seven equity mutual funds that claim to spurn investments for ethical reasons turns up some surprises. In the past year, four have beaten the average for all mutual funds tracked by Lipper Analytical Services and one has beaten Standard & Poor's 500-stock index (see table). Of the four that have been around for at least a decade, three have soundly beaten the market over the period. The top performer in the last year, Calvert Social Investment Fund of Bethesda, Maryland, set up shop two years ago. Because it disapproves of apartheid, the fund won't invest in a company with any involvement in South Africa. Calvert also avoids defense contractors and blacklists companies involved in nuclear power. Taboo, too, are liquor, tobacco, and gambling stocks. Companies that pass muster with Calvert include Affiliated Publications, owner of the Boston Globe, and Wisconsin-based Consolidated Papers, a papermaker with special appeal because it recycles waste products into fertilizer. These stocks helped Calvert score a 21.6% gain (counting reinvested dividends) for the 12 months that ended April 25, two percentage points more than the S&P 500. The champion long-term achiever in the group is Pioneer II, one of three high-minded funds run by Boston-based Pioneer Group. During the past five years Pioneer II gained 166.4%, vs. 127.4% for the S&P 500, and over the past ten years it returned 688.1%, compared with the index's 253.6%. About 20 years ago Pioneer Group discovered that many of its shareholders lived either in the Bible Belt or Utah, a Mormon stronghold, and it decided to stay out of companies involved in liquor, tobacco, and gambling. A sister portfolio, Pioneer Fund, also beat the S&P 500 over the past ten years with a 335.3% rise. The other fund that beat the market over the long term, Dreyfus Third Century, was up 423.2%. Dilemmas arise when managers find a company they like in a business they deplore. Though Pioneer II says it shuns alcohol, it has hung on to PepsiCo, which distributes Monsieur Henri wines and other imported libations. Apparently, a little alcohol is excusable.

CHART: TEXT NOT AVAILABLE DO-GOODER DERBY Four of these funds, all of which shun certain investments on ethical grounds, beat the mutual fund average over the past 12 months.