The objectives of socially responsible investors are pretty diverse--while some folks build an investment strategy on religious beliefs, others incorporate environmental values into their moneymaking code. There are 64 socially responsible mutual funds now available. While each offers a unique mission, they still have one thing in common: an image of poor performance. But that's not necessarily so.
Following Her Heart
Jody Rosenberg always assumed that she wouldn't make much money with socially responsible mutual funds. Even so, activism has been a guiding principle in her daily life. In college, she participated in an anti-apartheid movement. After law school, she ultimately became a state environmental lawyer, prosecuting industrial polluters. And in 1999, Rosenberg and her husband spent time in Bolivia to help the farmers in that cash-strapped country.
All along, Rosenberg has felt uncomfortable about investing in a mainstream mutual fund portfolio that might hold the stocks of tobacco, defense, and environmentally unfriendly companies. In 1992, her conscience won out. When Rosenberg quit a corporate law job, she took the $2,268 she had in retirement savings and plunked it into two so-called "social funds" that have since become part of the successful Citizens Funds' family.
Mutual funds are managed by an investment adviser who uses securities to create a diversified portfolio, which is owned by investors. The ultimate goal of nearly every mutual fund is simply to make money for shareholders. Social funds, however, add an extra step to the process by integrating ethical concerns with investment objectives. This approach sends an important message to companies, letting them know that investors are willing to allocate--or withhold--their dollars in accordance with personal objectives.
The "socially responsible" or "socially conscious" label is very loose. First appearing on the financial scene in the 1970s, some of the earliest social funds focused on religious issues, avoiding the traditional "sin" sectors such as tobacco, alcohol, and gaming. Today, a slew of funds now look for companies that have good track records in labor relations, workplace diversity, the environment, and community relations.
With so many social funds to choose from, there's certainly something for everyone. For example, the Women's Equity Fund buys the stocks of women-friendly companies. The Lutheran Brotherhood has a seven-fund family that follows the religious goals of the Lutheran faith, while the Amana Funds pursue Islamic principles. The Timothy Plan and the Noah Fund highlight conservative Christian values. And Catholic Values Investment Trust invests in companies with practices and products that are consistent with the core teachings of the Roman Catholic Church. On the other hand, the Pride Fund from Meyers focuses on companies with progressive policies toward gays and lesbians. As you can see, there are many choices for the individual investor.
Of course, social investing also has its naysayers. Daniel Wiener, who edits The Independent Adviser for Vanguard Investors' newsletters, argues that investors are better off making money with mutual funds that invest in the broader market for a chance at higher returns, then using the proceeds to benefit favorite causes. "There's absolutely no evidence that social investing leads to real social change," he says.
Kelly Ford, a Michigan schoolteacher and a shareholder in the Domini Social Equity Fund, disagrees, citing as an example the 1980s investor boycotts of companies doing business in South Africa. By refusing to invest in such stocks, individual investors and large pension funds helped bring down the apartheid regime. Today, Ford's top investing priority is finding companies with good track records in environmental and labor issues. "Social investing is consistent with what I am trying to achieve in other aspects of my life," the 26-year-old says.
Just how do social funds improve the quality of life? Many take an activist stance. Consider the MMA Praxis fund family, which follows the objectives of the Mennonite faith. It recently wrote to Merrill Lynch and Salomon Smith Barney to inform them that MMA refused to purchase any of the bonds these two leading brokerage firms underwrote for the China Development Bank. Proceeds from this bond offering are being used to build the massive Three Gorges Dam on the Yangtze River in China, a project MMA and many other environmentalists consider to be socially and environmentally disastrous.
And the popular Domini Social Equity Fund, one of the most activist in the social arena, was instrumental in convincing the Atlantic Richfield Company to withdraw operations from Myanmar, a country led by a repressive government. As a shareholder in Wal-Mart and Walt Disney, Domini has been leading the cause in the fight to end sweatshop labor by suppliers to those companies. "We are giving investors an opportunity to be part of making the world a better place," says Amy Domini, the fund's founder. "We make corporations aware that there is more than one bottom line."
Even the case of poor performance is getting tougher to make. A recent study conducted by Morningstar, a Chicago company that tracks mutual fund performance, found that socially responsible funds are twice as likely to receive the firm's top five-star rating compared with the total mutual fund universe. (To receive a five-star rating, funds must deliver top returns relative to their peers.) One of those five-star funds is the aforementioned Domini Fund, composed of about 400 stocks that have been screened for social and environmental criteria. The Domini Fund has beaten the returns of the Standard & Poor's 500 index for the past five years. The newer Citizens Index and Green Century Equity funds have beaten the market for the past three years.
Choosing stocks likely to increase in value is difficult enough; screening stocks further for ethical concerns is labor intensive, and even the most dedicated individual investor will have a tough time getting companies to answer questions. By investing in a mutual fund, you shift this burden to a professional money manager who has the tools and clout needed.
Making Your Decision
It's important to do your homework before investing in any stock fund. Balance the benefits and potential drawbacks of any fund against your long-term goals--both financial and ethical. Also, as you would if you were investing in individual stocks, aim to put money in a variety of funds and families (groups of related funds); it's much more risky to count on one fund to carry you all the way to retirement. Read the prospectus for each fund. Some individual investors even advocate investigating a fund's holdings yourself to be sure the companies meet your personal ethical standards.
You can find Morningstar's data on mutual funds, including fund holdings and performance history, in major libraries as well as online at www.morningstar.com. The new website www.socialfunds.com offers free profiles and links to nearly 60 mutual funds and also serves as a clearinghouse on all aspects of social investing, with a bevy of information on shareholder activism. Finally, "Investing With Your Values: Making Money and a Difference" (Bloomberg, 1999) is a concise, comprehensive guide to ethical investing.
Like most mutual finds, many of the funds mentioned in this article are available through major discount brokerages, and an investment of $1,000 is all you usually need to get started.
A word of caution: Socially responsible mutual funds do tend to incur higher expenses to cover the costs of screening and monitoring companies. A $1,000 investment in the Citizens Index Fund, for example, will cost about $16 per year. The bill for a similar investment in the Vanguard Index 500 Fund, by contrast, is about $1.80 annually. Now that the Domini Fund has grown to more than $1 billion in assets, shareholders are pressuring the company to lower its annual expense ratio. As your money grows, the difference over time could be a significant amount.
But to dedicated social investors, paying a little more or making a little less in exchange for a clean conscience is worth its weight in gold. "Hopefully, there will come a day when I can be diversified sufficiently and still avoid companies that are involved with abortion, tobacco, alcohol, gambling, and pornography," says Don Schisler, a St. Louis-area actuary who owns both the Timothy and Noah funds. "But until that happens, my own conscience is clear with the choices I've made."