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A Field Guide To Socially Responsible Mutual Funds - Part II Click here for Part I by
Marla Brill
Investment performance among socially responsible funds varies as widely as their social screens. Their investment strategies may focus on value, growth, large companies, small companies, indexing, or any other genre you’d find in the broader mutual fund universe. Some of the largest, best-known socially responsible funds use the S&P 500 Index as a benchmark, but screen out certain stocks that do not meet their social criteria. These include the Domini Social Equity Fund, the Citizens Index Fund, The Calvert Social Index Fund, the Vanguard Calvert Social Index Fund (based on the index devised by The Calvert Fund group), and the TIAA-CREF Social Choice Equity Fund. Established in 1991, The Domini Social Equity Fund is the oldest, followed by the Citizens Index Fund, founded in 1995. The Calvert, Vanguard, and TIAA-CREF offerings are all less than a year old. All of them are no-load funds except for The Calvert Social Index Fund, which carries a maximum front-end sales charge of 4.75 percent. The Vanguard and TIAA-CREF funds have low expense ratios of .25 percent of assets and .27 percent, respectively. The Domini Social Equity Fund’s expense ratio is noticeably higher at .95 percent, while the Citizens Index Fund expense ratio stands at 1.58 percent. Even though all these funds are based on a broad market bogey, they don’t own all of the same stocks. Each fund uses its own set of screens, which creates portfolios that are somewhat different from each other. That means that even though two funds may be based on the same index, their performance can differ substantially from one another. The Domini offering, for example, contains about 400 stocks, only half of which are in the S&P 500. The rest are winnowed out because of various social and ethical concerns, and replaced with 150 stocks allocated in line with the sector weightings of the S&P 500. The Calvert Social Index Fund and the Vanguard Calvert Social Index Fund screen from among the 1,000 largest companies in the US, and contain 464 names. Of the 300 companies in the Citizens Index fund, 200 are in the S&P 500 Index. Because these funds screen out many value stocks in the industrial and energy sectors, they tend to be underweight relative to their benchmarks in those areas, and overweight in technology and other growth sectors. Depending on which direction the market winds are blowing, they can underperform or outperform their benchmark by a substantial margin from year to year, a phenomenon professionals call “tracking error.” That’s a concern to Larry Swedroe, principal of Buckingham Asset Management in St. Louis, Mo., who says that these funds tend to perform better than the S&P 500 when growth stocks excel, but are likely to lag when value stocks take the lead. “What’s going to happen when large company growth stocks perform poorly for an extended period, as they did in the 1970s and 1980s?” he asks. “That’s a question these funds will have to face.” Joan Deneher of the TIAA-CREF Social Choice Fund management team says her firm is well aware of the tracking error issue, and is working “on making this fund’s performance and makeup as close to the S&P 500 Index as possible. We’re trying to find close substitutes for companies we eliminate through the screens and to keep the sector weightings as close as possible to the index.” Aside from index funds, the socially responsible universe has a number of noteworthy actively-managed offerings. These include Parnassus Fund, a mid-cap value offering, Pax World Fund, a balanced fund. Build Your Own Fund Even though the number of socially responsible mutual funds has mushroomed over the last five years, you may still have trouble finding one that adheres to your personal principles and performance criteria. One Internet service, Foliofn might be an alternative for investors who want to assemble their own socially responsible portfolios without buying individual stocks. “With mutual funds, it’s kind of an all-or-nothing thing when it comes to social issues,” says Foliofn vice-president Nancy Smith. “You have to accept what’s there. But a lot of people just have one or two areas of concern, such as tobacco or the environment. This service is a good fit for people like that.” Using Foliofn, an investor can choose from six pre-assembled stock portfolios—called folios--geared toward specific social issues. Another alternative allows the user to screen out specified companies from a basket of stocks designed to mirror the performance of an index, such as the Dow Jones Industrial Average or S&P 500 Index. The cost of $29.95 a month, or $295 a year, includes three folios and unlimited trading when orders are executed between 10:15 a.m. and 2:45 p.m. on weekdays. The service does have some limitations. Each folio is limited to 50 stocks. And, particularly for smaller investments, a mutual fund may be more cost-effective. The Foliofn site includes a cost calculator that can help you determine the alternative that best fits both your budget and your conscience. Get The Facts: For detailed fund information, risk, rankings, and performance, click here.
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