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Mutual Funds
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Funds with a conscience win
graphic November 28, 2001: 2:49 p.m. ET

Socially-responsible mutual funds are sticking to their principles and surviving volatile times.
By Sarah Max
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NEW YORK (CNN/Money) - When socially responsible mutual funds first came on the scene 30 years ago, the idea of using your retirement money to make an ethical statement was a pretty radical concept. For years, the investing world considered social funds fine alternatives for tree huggers and bible thumpers but not the place to make any real money. The funds' limited investment universe, said critics, crippled returns.

These days the critics are eating crow. Social funds enjoyed the same kind of double-digit returns as their peers during the bull market of the late 1990s and have done no worse than other funds since the market swung the other direction. Many have done better; 45 of the 115 social funds tracked by Morningstar have outperformed 75 percent of their category for the year through November 26.

Investors, it seems, have been paying attention. In 1995, assets in socially screened funds and separate accounts amounted to little more than $160 billion. According to a report released by the Social Investment Forum today, socially screened assets have passed the $2 trillion mark and now represent one in every eight dollars under management.

Why the change of heart?

The notion that socially screened portfolios produced inferior returns all but disappeared in the late 1990s when technology, a longtime favorite of social funds, took off and old-world companies went out of favor. At the same time, Big Tobacco's hundred-billion-dollar lawsuit, Nike's Asian labor woes and Monsanto's genetically engineered food fallout gave new ammunition to social investors' argument that their screens weed out risky companies.

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Meanwhile, mainstream investment firms like Vanguard and TIAA-CREF rolled out their own socially screened funds, and Corporate America gave its stamp of approval by adding such funds to its menu of 401(k) choices. By 1999 around 35 percent of employers offered a social investment option, according to a survey by the Calvert Group.

Even after tech stocks took a turn for the worse and other managers moved their money to "defensive" stocks like energy and industrials, social funds managed to find shelter in financial and pharmaceutical companies.

What does it do to your bottom line?

Firms that manage social funds typically have two research departments (hence, above average management fees) with one group studying such things as companies' environmental and labor practices and another group focusing strictly on the financials.

Every fund has its own investment and social criteria, though social funds do tend to overweight technology companies, which are more likely to pass their social screens than companies in other industries. In fact, six of the 10 most commonly held stocks in Morningstar's social fund universe are technology or communications companies.

Although many social fund managers try to mirror their respective indices, their screens keep them away from companies that are staples in most other portfolios. General Electric (GE: down $1.44 to $39.63, Research, Estimates) and Exxon Mobil (XOM: down $0.14 to $37.21, Research, Estimates) , for example, are among largest stocks by market capitalization but are excluded from most social portfolios for environmental reasons.

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These screens have also kept social funds from making money off some of the hotter industries this year. Auto retail stocks are up 145 percent, according to Morningstar. Gambling stocks are up 60 percent, and tobacco is up 33 percent.

When asked about the money they could have made on "sinner" stocks, social investors shrug and point to the long-term. "The social screens in and of themselves do not detract from performance," said Kemal Ahmed, vice president at Calvert funds. "We've demonstrated with several of our products that our social screens have helped us outperform over the long run."

Calvert looked at the companies that passed their investment criteria for their Social Equity Fund but failed their social screens and found that they would have had a 17 percent cumulative return on that group over three years versus 62 percent on the companies that passed their screens.

"Social concerns are increasingly becoming investing concerns, and all of Wall Street is starting to factor these issues into its investment decisions," said Alisa Gravitz, director of the Social Investment Forum.

This is not to say that social investor's research or screening is foolproof. This month two employees of Johnson & Johnson (JNJ: up $0.02 to $60.03, Research, Estimates) , the third largest holding in social funds, filed a lawsuit contending that the company had discriminated against them and other minorities at the company.

Many portfolios, many missions

Just as managing a social portfolio takes almost twice the work, so too can choosing a social fund. Not only do investors want to find a fund that meets their investment criteria, they need to find one that fits their social criteria as well.

Some funds, such as Calvert Social Index, screen companies on everything from alcohol to animal testing and labor rights. The Brideway Social Responsibility fund, on the other hand, only excludes tobacco and defense companies.

Other funds emphasize specific issues. Women's Equity fund, for example, focuses on buying firms that promote women, while MAA Praxis funds, which are the investing arm of the Mennonite church, go to great lengths to screen out companies that distribute pornography.

A further consideration for individual investors is whether they want a portfolio that simply excludes certain companies or one that invests in less-than-perfect companies but use its influence to get them to change their ways. "In the social arena you have funds that follow very strict screens and funds that use their shares to push for change," said Tim Smith, who is a senior vice president at Walden Asset Management and considered a pioneer of social investing.

According to the Social Investment Forum's latest report, social investors are increasingly doing both. "More institutions are screening out the very worst social but also using shareholder advocacy to improve those that don't make the grade," said Alisa Gravitz.

For a snapshot of funds' social screens click heregraphic

* Disclaimer





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