Over time, social funds hold their own

In a murky market, many investors are cleaning up their act.

Forgoing traditional performance-oriented strategies, a growing number of individual and institutional investors are limiting their investment universe to companies and funds screened for social and environmental friendliness. And they're finding that, contrary to popular belief, there are financial rewards.

Assets in socially screened investment portfolios under professional management rose by 36 percent from 1999 to 2001, topping the $2 trillion mark for the first time last year, according to the Social Investment Forum's (SIF) recently released 2001 Report on Responsible Investing Trends in the United States.

"This data would be remarkable at any point of time, but it is particularly striking when you realize that we had bearish markets for most of the time period covered by this study," says Steve Schueth, spokesperson for the forum and president of Colorado Springs-based First Affirmative Financial Network.

Nearly 12 percent of all investment assets now under professional management in the United States are subject to one or more of the main practices associated with socially responsible investing: screening, shareholder advocacy, and community investing.

Broadly defined, socially responsible investing is a process that considers the social and environmental consequences of investments.

Mr. Schueth notes that all social investors are not of one stripe. "There's a wide menu of social issues our investors care about," he says, placing the issues into two primary camps: avoidance and positive screening.

Avoidance means investors keep their money from supporting traditional "sin stocks" or "addictive stocks," such as alcohol and tobacco, and also includes stocks in nuclear-power utilities, weapons manufacturers, or companies with patterns of egregious pollution.

In positive screening, "we're looking for companies that are better than their peers in areas such as employer/employee relations, where minorities and women are represented in management, [and] companies that produce quality products that benefit for society at large," he says. Respect for human rights and sound environmental policies also are considered, among other issues.

And to cater for all of these needs and concerns, mutual-fund investors have a growing range of choices. The SIF cites 230 mutual funds in the US that incorporate social screening into the investment process - up from the 168 funds identified in 1999. (This number does not include multiple-share classes of the same fund.)

Amy Domini, president of Domini Social Investment, says this increase is a major driving force behind the growth of this sector. Investors simply appear more comfortable with greater choice.

Yet the wider range of offerings hasn't led to asset growth. Due in part to the sustained market downturn of the past year, assets of socially screened mutual funds were essentially the same in 1999 ($154 billion) as in 2001 ($153 billion), according to SIF.

Still, socially responsible funds held their own in a down market. Morningstar analyst Catherine Hickey acknowledges that, on the whole, these funds have been "pretty good," and that they tended to be higher quality than their counterparts on an apples-to-apples basis.

Although one benchmark, the Domini 400 Social Index, failed to outperform the Standard & Poor's 500 Index last year, its performance over both five years and 10 years exceeded that of the S&P 500.

The index includes 400 companies and screens out those linked to tobacco, alcohol, gambling, or nuclear power. Being weighted in technology, it fell 12.1 percent through Dec. 31, while the S&P 500 was down a marginally better 11.9 percent during that period.

On an annualized basis, over 10 years, the DSI 400 offered a 13.8 percent return, compared to the S&P 500's 13.0 percent.

Ms. Hickey says investors now know that they don't automatically sacrifice performance when they invest with their values in mind. "That said though," she warns, "[these funds] are not all alike, and you should definitely look under the hood before you buy."

For instance, it's important to check out the expense ratio, as some funds do charge more due to the extensive nature of both the qualitative and quantitative screening process.

Schueth adds that investors should understand the investment philosophy of the fund they're buying into - in both the financial and social-screening aspects.