05-Oct-2004
Socially-responsible Fund Investing
By Amy B. Crane
While the origins of socially responsible investing can be traced back to ancient times, it has entered the investment mainstream during the last 30 years. Two Methodist ministers launched Pax World, the first socially responsible mutual fund, in 1971. Today there are more than 70 mutual funds that follow various socially responsible criteria.
More than one out of every nine investing dollars is invested in a professionally managed socially responsible portfolio, according to a 2003 study by the Social Investment Forum. This translates into $2.16 trillion in assets and includes money in mutual funds, pension funds, foundations and religious organizations.
"What I see happening is that once they know about it, people like the idea of socially responsible investing," says Alisa Gravitz, vice president of the Social Investment Forum. "The great news is that with socially responsible investing you can have a double impact: competitive performance for your portfolio and the knowledge that you can make a difference with corporate accountability."
How Socially Responsible Mutual Funds Work
Socially responsible funds start with screening, which involves including or excluding a company’s stock or bonds from a fund's investment universe based on certain qualities and values. Since there are thousands of companies that are potential investments for a fund, the screening process whittles down the number of companies that fund management will analyze.
Fund managers screen out companies that engage in objectionable practices and screen for companies that engage in socially positive practices. For example, many funds managers screen out companies that manufacture or promote alcohol, tobacco, gambling and weapons and screen for companies that promote positive social issues such as human rights, labor relations, community investment and community relations.
"The interesting thing about socially responsible investing is that social investors agree on 80 to 90 percent of the most important social issues," says Gravitz. "They see eye-to-eye on core issues and disagree on other issues. For example, abortion is an important issue for some socially responsible mutual funds with a religious orientation."
Social Screens
"Because these screens are so crucial to the make-up of a socially responsible mutual fund's portfolio, it's important to think about your values and what criteria are most important to you before you invest," says Debra Neiman, a certified financial planner with Neiman Maloy Financial Group in Wakefield, Mass.
"Socially responsible investing can mean two totally different things to two different people," she says. "Once you've decided what values are the most important to you, then you can find a fund that expresses those values and meets your financial goals."
To find out what particular criteria a socially-responsible fund uses to screen the universe of funds, read it’s offering prospectus, visit its Web site or call customer service. The Social Investment Forum (www.socialfunds.com) offers an overview of the criteria that different funds screen for, including alcohol, tobacco, gambling, defense/weapons, animal testing, products/services, environment, human rights, employment/equality and community investment.
There are funds designed to cater to the values and concerns of many religious groups. Such funds include the Aquinas Funds family, which follow the Catholic investing guidelines of the National Conference of Catholic Bishops.
Shareholder Activism
Shareholder activism is a second component of socially responsible investing, and is not one that is followed by all socially responsible mutual funds.
"Shareholder activism really made its mark in South Africa 20 years ago," says Gravitz. "A goal at that time of shareholder activism was free and fair elections in South Africa, and by pressuring U.S. companies not to invest in South Africa, the social investing industry helped bring that about. In fact, the African National Congress later said that shareholder activism made a huge difference."
There are four components to shareholder activism, which are based on the belief that shareholders can bring about positive social change in the companies they invest in. According the to SRI World Group, which runs the Web site Socialfunds.com, they are:
• Voting proxies on social and environmental issues at company annual meetings.
• Engaging in a dialogue with company management.
• Sponsoring shareholder resolution.
• Divesting a company from an individual or fund portfolio.
Community Investing
Community investing is the third and least well-known component of socially responsible investing. Through community development financial institutions and community development corporations, money is used to address social problems ranging from urban decay to declining public health.
Individuals can in some cases directly invest in these institutions. There are also some money market, stock and bond mutual funds that direct a portion or all of their assets toward community investing.
For example, the Domini Money Market Account has its shareholders' capital held at the Shore Bank of Chicago, the largest community development bank. Accounts are insured by the FDIC and offer free checking. With its deposits, the bank makes development loans that, among other activities, provide financing to local businesses that rebuild inner-city neighborhoods and finance small businesses.
Several Calvert, Parnassus and Domini stock and bond funds invest certain portions of their assets in community development activities. Parnassas Fund, a socially responsible mid-cap stock fund, may invest up to 5 percent of its assets in community development loan funds.
Indexes & Funds
In terms of performance, socially responsible funds vary widely based on their social screening policies, their market-cap orientation and growth or value bent. There are many types of socially-responsible stock funds as well as balanced funds, bond funds and money market funds.
Many socially responsible funds are based on various indexes constructed by fund families that specialize in socially-responsible investing. These indexes are designed to reflect different socially-responsible values and criteria.
Leading indexes include the Domini 400, the Calvert Social Index, the FTSE4Good indexes and the Dow Jones Sustainability indexes. Other funds are actively-managed by a fund manager or managers who select securities for a fund portfolio based on their own particular criteria.
The largest socially-responsible funds don’t come close to the size of the largest traditionally-run mutual funds, but they are growing. The five largest funds as of Aug. 30 are the Ariel Fund, Ariel Appreciation, Pax World Balanced, Domini Social Equity and New Covenant Growth Fund.
Expenses
As a group, socially responsible funds tend to have somewhat higher expenses than other funds. Since many of the funds aren’t large in terms of assets and are run by small fund families, they tend to have higher expenses. Also, socially responsible screening adds a layer to the stock and bond analysis process that fund managers and fund staffs go through while searching for stocks suitable for a fund portfolio.
Expenses vary tremendously from fund to fund, so be sure to check a particular fund's expenses before you invest. Fund expenses include the expense ratio, which is the fund's cost of doing business, expressed as a percentage of the fund's assets.
Sales charges, or loads, are another expense charged by some funds. These loads are assessed as a percentage of your fund investment and can be charged either when you initially invest, when you sell your fund shares or during the entire time that you hold your fund investment. Other expenses that funds may assess include 12b-1 fees that pay for marketing and distribution expenses and redemption fees that some fund companies impose to discourage market timers.
Other Considerations
Investors need to examine other factors about a particular socially responsible fund before they invest. Management's track record is particularly important.
Fund managers with five or more years of experience with a fund have built up a record that can be examined and compared to index benchmarks. New funds or funds with new managers are difficult to evaluate because they have no history to examine.
Portfolio turnover -- the number of times a fund manager buys and sells stock in a year's time -- is also an important issue. "I own Neuberger Berman's Socially Responsible Fund," says Roxanne Kellam of San Francisco, Calif. "What I like about it is that it fits nicely into my basket of funds, and it has a reasonable turnover rate."
Because the socially responsible mutual fund universe encompasses a large group of funds with different social objectives, decide what objectives are most important to you and then compare similar funds to each other before investing.
A version of this article originally appeared in Better Investing Magazine.
Link of the month: Want to learn more about socially-responsible investing? Check out www.socialinvest.org
