Many investors these days are looking to balance their ethical beliefs with financial goals such as buying a house or funding a comfortable retirement. Such investors increasingly are turning to socially responsible mutual funds in an effort to make money without compromising values.
Socially responsible funds typically shun companies that make products harmful to the environment or to the health of humans and animals. As such, these funds commonly avoid investing in firms that manufacture or sell weapons (Raytheon, for example), tobacco (Philip Morris) or alcohol (Seagram).
Meanwhile, new types of socially responsible funds have cropped up during the last decade or so. These days, investors can find funds – religious and secular – that avoid shares of firms that have poor labor policies, conduct animal testing or sell pornography.
Increasingly, socially responsible funds don’t just weed out the bad guys, they also screen for companies with a strong record in categories such as workplace diversity, women’s rights, environmental action and so on. The most aggressive managers of these funds are even buying up shares in companies that aren’t eco-friendly in an attempt to change those firms’ policies.
Socially responsible funds are catching on with investors. Assets in such funds grew five times faster than those of other funds during the last 30 years, according to a recent study by the Pax World Funds.
The number of socially responsible funds now stands at roughly 70, up from just 13 in 1991. Even big-name fund families have gotten into the SRI business: Vanguard last year launched Vanguard Calvert Social Index (800-662-7447; $3,000 minimum; no load), which snubs firms involved in tobacco, firearms, alcohol, nuclear power and gambling.
The growth in SR funds is due in part to the aging baby boomers, many of whom are looking to balance profits with their peace-loving ideals from the 1960s.
Another reason is performance: Socially responsible funds have delivered competitive results in recent years, despite the fact that they must select from a much smaller universe of stocks than the typical fund manager.
Consider that the typical socially responsible fund gained 10.7 percent annually during the last five years – only 0.4 percentage points less than the 11.1 percent return for the typical U.S. diversified stock fund during that time.
Socially responsible funds also have held up better than their peers during the market downturn of the past year.
THE FLIP SIDE
Socially responsible investing has its critics, however, who doubt that these funds can significantly affect corporate policies and practices. Others argue that some so-called SRI funds hold shares of firms that are not exactly green friendly. For example, Neuberger Berman Socially Responsive screens for firms with better environmental and workplace records than their peers. The fund owns shares of oil and natural gas company Newfield Exploration – which might make some SRI investors a bit uneasy.
That said, many investors looking to inject non-financial values into their portfolios generally are well-served by such funds. When considering an SRI fund, make sure the manager’s investment criteria match up with your values. You can investigate a fund’s style on the Web at Morningstar’s site (http://www.morningstar.com), the Social Investment Forum (http://www.socialinvest.org) or through the fund company’s site.
Next, take a close look at the fund’s portfolio for any individual holdings that don’t meet with your approval. And of course, study its performance relative to its peers.
One of the oldest and best SRI fund offerings is Domini Social Equity (800-762-6814; $1,000 minimum investment; no load), a socially screened index fund made up of roughly 400 large-cap stocks. Manager John O’Toole avoids tobacco, alcohol and weapons producers, while favoring companies with strong environmental and diversity records. The fund has a history of shareholder activism-for example, it has challenged Nordstrom and Wal-Mart to improve working conditions for their overseas labor forces. Domini Social Equity has gained 13.1 percent annually during the past five years, only 0.3 percentage points less than the S&P 500.
Investors also might consider Vanguard Calvert Social Index (800-662-7447; $3,000 minimum; no load), thanks largely to its low expenses (0.25 percent of assets). The fund, a large-cap offering, recently held the bulk of its assets in technology, health care and financial-services stocks. Other SRI funds worth a look include Citizens Core Growth (800-223-7010; $2,500 minimum; no load) and TIAA-CREF Social Choice Equity (800-223-1200; $250 minimum; no load).
(Clint Willis is a freelance writer who covers mutual funds for Reuters. Any opinions in the column are solely those of Mr. Willis.).