Socially responsible funds, and the ideals behind them, are becoming more mainstream, but building a truly diversified portfolio with them remains a challenge.
The realm of socially responsible investment funds is a niche that is still growing -- in fact, at a faster pace than the mutual fund world as a whole, according to the research company Morningstar Inc. But one of the things that can make it a confusing area for investors is the wide diversity of values SRI funds attempt to incorporate. And since the majority are fairly small in terms of assets, bargain hunters may not be thrilled with their fees.
Still, those who believe in the idea of looking beyond the basics of the balance sheet say screening for good environmental, social and governance citizenship bears rewards.
"If a company has been thoughtful about the impact they have on the environment, chances are they've also been thoughtful about how they treat their employees," said Matthew W. Patsky, co-manager of the Winslow Green Growth Fund (WGGFX), one of the few small-cap SRI offerings. "There's growing evidence, and broadening acknowledgment, that these kinds of nonfinancial issues are important to long-term performance."
Among large-cap domestic equity, a fair number of choices are available. One of the biggest SRI fund shops is the Calvert Group of Bethesda, which screens its holdings according to social criteria, eliminating alcohol, tobacco, gambling and weapons companies, as well as firms with poor environmental and labor practices. Among its funds is the Calvert Social Investment Equity (CSIEX), which has developed a good record under manager Daniel W. Boone III of Atlanta Capital Management Co. But despite substantial asset gains, the fund's expense ratio has remained a relatively high 1.24 percent.
Among faith-based shops, one of the best known are the four Ave Maria Mutual Funds, which seek to incorporate Roman Catholic values, and "pro-life and pro-family beliefs." Toward that end, Ave Maria screens out companies connected with abortion and pornography or that offer non-marital partner benefits to their employees.
What gets screened out depends on the church. The four New Covenant Funds, affiliated with the Presbyterian Church, use broad screens to avoid alcohol, tobacco, gambling and certain elements of defense -- specifically, companies highly dependent on military contracts and those that develop weapons that kill indiscriminately, such as nuclear weapons, land mines and chemical weapons. The idea is to avoid anything that can hurt noncombatants in a war, said George W. Rue III, New Covenant's chief investment officer. And like many SRI funds, New Covenant isn't afraid of a little shareholder activism.
"We're not against a proper defense of our country," Rue said. "But we're trying to have some level of control. . . . We're trying to avoid a heavy business sending military products to foreign countries, and indiscriminate weapons. We want to be a voice out there saying we want those things reduced."
Part of the reason it's difficult to create an all-SRI portfolio is that there is only a handful of pure international SRI funds, said Greg Carlson, a fund analyst at Morningstar.
"The SRI investing world is still relatively new. A lot of firms are still trying to establish a good track record in domestic small caps and mid caps," Carlson said. "It requires a ramping-up on the social research side, as well. And with some overseas companies, you see less transparency than you do domestically."
Among the foreign SRI options, the Calvert World Values International Equity Fund (CWVGX) may look appealing at first, but it has not done well compared with non-SRI offerings. The shop brought in an accomplished sub-adviser, Grantham, Mayo, Van Otterloo & Co., in 2002, but the manager's value-investing style has not meshed well with Calvert's social screens, Carlson said. On top of that, Carlson said, the fund's 1.96 percent expense ratio makes it too expensive to recommend.
A second all-foreign SRI option is MMA Praxis International (MPIAX), a faith-based fund that incorporates Christian values and avoids industries that profit from alcohol, gambling, tobacco, abortion-specific products and military contracting. While this fund has not been a great performer in the past, and expenses remain high, a new management team hired in 2003 makes it worth watching.
A third foreign option emerged when Domini Social Investments LLC launched the Domini European Social Equity Fund (DEUFX) on Oct. 3. Domini seeks to avoid companies that profit from tobacco, alcohol, gambling, nuclear power, firearms and military contracts, and may also exclude companies with poor corporate governance and labor records.
Some SRI funds offer limited international exposure, but there's no guarantee on how consistent that exposure will be, because it's at the manager's discretion. For example, Pax World Balanced (PAXWX), a smartly managed stock-and-bond fund that routinely beats the returns of similar non-SRI offerings, currently has a 15 percent stake in foreign equities. With $1.8 billion in assets, it's one of the largest SRI funds around, a feature reflected in its relatively low 0.95 percent expense ratio.
The Neuberger Berman Socially Responsible fund (NBSRX), a large-cap fund with an outstanding track record that has earned it five stars from Morningstar, has a 27 percent stake in overseas stocks. Others have sought opportunities abroad when there was a dearth of choices at home, including the Winslow Green Growth fund, which has invested in foreign wind stocks, companies that manufacture wind turbines.
An inexpensive offering is the Vanguard Calvert Social Index fund (VCSIX), though it is in the midst of some changes, as it switches its benchmark to the FTSE4Good U.S. Select Index, a socially responsible index provided by London's FTSE Group. The transition is expected to take place by Dec. 31. Fees are not expected to change, nor is the fund's goal of avoiding alcohol, tobacco, gambling and pornography.