A Field Guide To Socially Responsible Mutual Funds - Part I

by Marla Brill
Publisher, Brill’s Mutual Funds Interactive

Aligning his conscience with his wallet was a notion that always made sense to Alex Levin, a 34-year-old program development director for a Washington, D.C.-based non-profit organization. So in the early 1990s, when his employer offered the option to invest his retirement money in a mutual fund that screens out stocks of alcohol, tobacco, and other companies whose businesses do not adhere to certain ethical or moral practices, he decided to take the plunge into socially responsible investing.

“If I don’t support the actions of a company intellectually, then I am certainly not going to support them with my money,” he says. “Over the long run, I believe that a company that tries to do good will perform better than one that doesn’t pay attention to the ethical concerns of its stakeholders.”

The Parnassus Fund, the first socially responsible mutual fund Levin invested in, has ranked among the top mid-cap value funds over the last three years, according to Morningstar. Since that investment, he has also put money into the Citizens Index Fund, Citizens Emerging Growth Fund, and Calvert Index Fund, three other socially screened mutual funds.

Since Levin’s first foray into socially responsible investing, the practice has grown from a fringe movement with a flower child reputation into a mainstream strategy among pension funds, and, increasingly, individuals. According to the non-profit trade group Social Investment Forum, more than $2 trillion is invested today in the United States in a socially responsible manner, up a strong 82 percent from 1997 levels. That’s nearly twice the rate of asset growth of all assets under management in the US.

Much of that growth has come from mutual funds. The number of screened mutual funds increased to 175 in 1999 from 139 in 1997, and just 55 in 1995. The introduction of two socially responsible mutual funds earlier this year by industry giants Vanguard and TIAA-CREF, to some observers, signals the true coming of age of socially responsible investing.

Says Social Investment Forum President Steve Schueth,  “The clear message is that socially responsible investing is now firmly on a path of steady growth thanks to the nearly universal acceptance of social investment as a viable and value-added approach to asset management.”

While some investors view socially responsible investing as a moral or ethical choice, the strong performance by several of the largest, most visible socially responsible funds has added to their appeal and popularity. Two of the most well-known funds, the Domini Social Equity Fund and the Citizens Index Fund, have out-performed their benchmark S&P 500 Index over much of the last ten years. They have done so, in part, both by avoiding the litigation woes of tobacco and oil companies, and gravitating toward technology stocks and other “growthy” sectors the market favored for most of the decade.

Moral Compasses With Different Directions

Broadly defined, socially responsible investing is the practice of integrating values-based criteria into the investment process. But the notion of what represents “values” spans the rainbow of individual moral compasses, and varies enormously from fund to fund. Before you take the plunge into socially responsible investing, it’s important to know if a mutual fund’s values align with your own, as well as whether its investment strategy makes sense for you.

Socially responsible mutual funds are broadly divisible into religious or secular funds. The latter group, considered to constitute the mainstream of socially responsible investing, includes some of the largest and best-known names, such as the Domini Social Equity Fund, Parnassus Fund, and the Citizens Funds. At a minimum, they usually avoid companies involved in tobacco, alcohol, nuclear power, and weapons production. Depending on the fund’s charter, other screens might include animal testing, gambling, labor relations, or community investment.

Secular funds may have anywhere from one or two screens, to ten or more. The Bridgeway funds falls loosely into the socially responsible category by sidestepping companies involved in the tobacco or defense industries. (Many mutual funds that aren’t labeled socially responsible have no presence in those sectors anyway because their manager do not view them as good investments, although avoiding them is not an official policy.) At the more stringent end of the scale are families like the Citizens Funds, which include alcohol, tobacco, gambling, defense, animal testing, the environment, human rights, labor relations, employment equality, and community relations in their screens.

A number of funds zero in on specific social concerns. The Women’s Equity Fund invests in companies that have exhibited fair treatment of women and minorities in their hiring and promotion practices, and the way they portray them in advertising. Green Century Balanced Fund emphasizes companies that promote a healthy environment. New Alternatives Fund invests mainly in companies concentrating in the solar-power and alternative-energy industries. And Meyers Pride Value Fund scouts out companies with progressive policies toward the gay and lesbian community.

Social criteria vary among religious funds as well, and not all funds apply the same screens. Some of the companies they include, or exclude, may surprise you.

Noah Fund, one of the top-performing large company funds over the last three years, does not invest in companies involved in alcohol, tobacco, and gambling. It also avoids those with a record of involvement in pornography and abortion.  

The fund’s list of no-buys contains some surprising names, including Walt Disney. Fund founder William Van Alen, a former attorney and a born-again Christian, doesn’t like some of the sexually explicit material produced by the company’s film division. At the same time, Noah includes many companies that provide domestic partner benefits for unmarried couples because it takes into consideration only what companies do to make profits, not what they do with those profits afterward.  That allowance has made it possible for the fund to invest in large, growth-oriented companies that often provide such benefits, and that have out-performed the market over the last few years. 

By contrast, the Timothy Plan, another Conservative Christian fund offering, avoids companies that promote “non-traditional married lifestyles” by providing domestic partner benefits. But with its emphasis on small company value stocks, which have been out of favor for most of the last few years, investors taking this fund’s moral high road have had to suffer through some lengthy periods of low returns.

Other religious funds focus on concerns of specific denominations. The MMA Praxis funds, for example cater to Mennonite investors, while Amana funds serve Islamic investors.

A good place to get a handle on what kinds of issues the universe of the socially responsible funds focus on is the Social Investment Forum web site at socialinvest.org. Christian investors looking for religious fund alternatives can consult Crosswalk.com.

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