Amy Domini

Domini Social Equity Fund

by Marla Brill
MFI Publisher

Over 20 years ago, just after her chaplain at Harvard University asked her to review the church’s investment portfolio, Amy Domini made it her mission to combine profitable investing with personal principles. "I was surprised to find a number of companies that were involved with manufacturing weapons," she recalls. "First, I wondered why the church would invest in something it didn’t believe in. Then, I realized the reason was probably because there was very little information available on corporate ethical practices."

Since then, Domini has built a reputation for finding the unethical dirt under a company’s fingernails for the growing number of investors concerned about such issues. According to the nonprofit 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 a far cry from 1990, when Domini brought social screening into the mainstream with the Domini 400 Social Index, an unmanaged index of 400 socially screened stocks designed to mirror the performance of the overall market, as measured by the Standard & Poor’s 500 Index. The Domini 400 consists of about half the stocks in the S&P 500 Index—the rest are eliminated because of various social and ethical concerns, including involvement in tobacco, weapons manufacturing, gambling, alcohol, and practices that threaten the environment—plus another 150 stocks allocated in line with the sector weightings of the S&P 500.

"My goal in creating the index was to challenge the notion that socially responsible investing translates into poor performance," she says. "I wanted to see how closely a socially screened index would do relative to a comparable index without such restrictions."

Through most of the 1990s, the Domini Social Equity fund, based on that index, took a leading role in dispelling such negative views by generating market-beating returns. Part of the reason was that its social screens allowed it to sidestep the fallout from litigation woes of tobacco giant Philip Morris, the environmental concerns of oil companies like Exxon, and the problems of electric utilities with hefty nuclear commitments.

"One of the unintended consequences of social screening is that we invest in high-quality companies whose management is very attuned to issues such as diversity, the role of women and minorities, and recycling," she says. "The most important bias we have is smart management."

But another bias makes it apparent that the Domini Social Equity Fund provides a rippling reflection, rather than a mirror image, of the S&P 500 Index’s ups and downs. The same may well hold true as performance numbers unfold for the increasing number of socially-responsible index funds being introduced into the market by industry giants such as Vanguard and TIAA-CREF.

The reason is simple: because of their social screens, which eliminate oil company stocks and many industrial companies, these funds tend to be underweight relative to the benchmark in energy and other value sectors, and overweight in technology and "growthier" areas.

With growth stocks taking the lead for most of the decade, that leaning has generally worked in the fund’s favor. In some years, such as 1998, Domini’s fund outperformed the index by five percentage points. But this year’s rebound in energy issues and other value stocks, and the decline in the technology sector, has left it lagging the S&P 500 year-to-date.

That also happened during the Gulf War, when the Domini index slipped behind the S&P 500 because it had no exposure to weapons manufacturers and international oil companies. It also underperformed the market in 1993, when anticipation of an economic recovery drew investors to the cyclical titans of heavy industry such as General Motors and Caterpillar.

Domini acknowledges that while her fund "is a socially-responsible proxy for the S&P 500 Index," its performance can vary significantly from that of its benchmark from year to year. "But if you measure over the long-term, the performance is fairly similar," she points out.

Aside from providing the average investor with a way to invest with a conscience, Domini says her $1.6 billion fund gives her the clout she needs to have a voice at the upper echelons of corporate America. She views shareholder advocacy as an important part of the fund’s mission, and notes proudly that "we’ve filed more shareholder resolutions than any other mutual fund in America."

Click here for other information about Domini and her fund.