Socially Responsible Funds Come Of Age

by Alan Lavine and Gail Liberman

Who would have thought that socially responsible stocks would outperform the market 15 years ago when the Domini 400 Social Index began?

The index was developed by KLD Research & Analytics, Boston in May 2005. Today, the Domini 400 Social Index is the generally accepted benchmark for the market of publicly-traded equities socially responsible investors buy. It is made up of 400 U.S. companies that pass multiple, broad-based social and environmental screens.

Socially responsible companies are companies that have employee-friendly management and are not in the gaming, arms, and drug or alcohol businesses.

 Here is how the index has performed over the longer term versus the S&P 500, an index of the 500 largest companies traded on the New York Stock Exchange.

• The Index has gained 439 percent since inception in May 1, 1990. By contrast, the S&P 500 grew a total of 382 percent.

• Over the past 10 years, the index has grown at a 10.83 percent annual rate. By contrast, the S&P 500 has grown at a 10.28 percent annual rate. Although the index beat the market over the past 10 and 15 years, it has lagged behind over the past three years.

• The Domini 400 Social Index has grown at a 3.51 percent annual rate over the past three years. By contrast, the S&P 500 has grown at a 4.24 percent annual rate.

Peter Kinder, president and co-founder of KLD, says that in any given year, socially responsible stocks may lead or lag the overall stock market. What’s important, however, is that investors who have strong ethical concerns have attractively performing stocks they can buy.

  “Most investors, social or not, now demand that the companies they invest in will practice good governance, and by now. expect good corporate citizenship,” he said. An ever-increasing group of investors make the effort to incorporate social concerns into their investment decision making.”

 So how can anyone invest in this index of socially responsible companies?

 There is an exchange traded fund (ETF) that tracks an index of socially responsible stocks. The “iShares KLD Select Social Stock index” owns 250 to 350 large company stocks. The top three holdings of the index include Wells Fargo, Microsoft and Procter & Gamble.

Exchange traded funds own a basket of stocks. You purchase shares, which are traded on the stock exchange, and pay a broker commission. Essentially, you are a stockholder of an investment that owns socially responsible stocks. Exchange traded fund management fees tend to be very low. Plus, unlike mutual funds, they don’t pay taxable year-end capital gains.

 Be advised: There are risks because these funds could decline in value when the overall stock market declines. The Domini 400 Social Index tends to track the S&P 500’s performance.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.