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What-I-Believe-In Investing

Can, say, an oil company, be considered an eco-responsible company? What about a company that caters to “non-married” lifestyles? Is that “socially responsible”? One man's virtuous stock is another man’s sinful stock.

Can, say, an oil company, be considered an eco-responsible company? What about a company that caters to “non-married” lifestyles? Is that ethical? One man's virtuous stock is another man's sinful stock. The wide, wide world of SRI funds.

Well, maybe that's a stretch. But really, what one investor thinks is socially responsible will depend heavily on his personal beliefs. In other words, one investor's virtue stock is another investor's sin stock. And, with the proliferation of SRI funds these days, navigating which funds cater to your clients' particular political, moral or religious creeds can be quite a task.

For instance, does she believe gay marriage is a sin? Well, then she can try the Timothy Plan Large/Mid Cap Value, an “evangelical” mutual fund that, the company says, “employs specific moral screening criteria designed to avoid investing shareholders' money in any company that has a pattern of contributing to the cultural degradation of our society.” For Timothy Plan, that includes companies “involved in abortion and/or pornography, non-married lifestyles, as well as companies involved in the production of alcohol, tobacco or gambling,” says the fund's website.

Actually, alcohol and tobacco are just about the only two industries that get cut from nearly everybody's SRI list (except, funnily enough, for a couple of Catholic pension plans). But Timothy's list of verboten companies also cuts a wide swath, knocking out some 626 companies, including Aetna (for its exposure to “abortion, anti-family, alternative lifestyles”); several pharma companies, including Merck (blacklisted for the same reasons); Microsoft (same list of three); JPMorgan Chase (abortion, alternative lifestyles); News Corp. (pornography, alternative lifestyles); Starbucks (alt lifestyles, vice) and — of course — Walt Disney (abortion, anti-family, alternative lifestyles). Incidentally, Timothy Plan Large/Mid-Cap Value is a top-performing social stock fund, which outdid 96 percent of its large-blend competitors during the past five years. The Timothy Plan fund says it achieved its strong record by sticking with companies that have improving balance sheets and cash flows.

Of course, some SRI advocates might object that the Timothy Plan is not an SRI fund at all, but belongs in the separate “faith-based” category along with other “Christian” and “Islamic” funds. But, ultimately, the intent of faith-based funds and other SRI funds is the same: To make money in investments that will help make the world a better place — as the investor sees it. KLD Research & Analytics, one of the foremost SRI research firms, defines a SRI research screen as “non-financial criterion that augments an investor's financial standards and reflects the investor's social, ethical or religious concerns.”

Morningstar now tracks 96 socially responsible funds that follow a variety of niche approaches. Religious funds typically avoid producers of tobacco and pornography. A growing number of green specialists emphasize companies involved in alternative energy. The funds have total assets of $47.6 billion, up from $21.8 billion in 2002.

Assembling the perfect SRI portfolio can be complex. While some investors in the category are the kinds of people who shop at Whole Foods and drive hybrid cars, many social shareholders defy easy categorization. “I have feminist clients and religious clients,” says Charles Sandmel, a financial advisor in Brookline, Mass., who is associated with First Affirmative Financial Network, an RIA that specializes in social investing. “My clients tend to be professionals and social workers rather than business owners, but their tastes run all over the map.”

Some advisors with a heavy emphasis on socially responsible investing actually screen their own SRI clients. Take Jon Ellenbogen, a Wachovia Securities advisor and nine-year veteran who specializes in SRI. He won't take anybody whose beliefs he doesn't agree with. “I have had somebody who wanted to invest in abortion rights companies. I said that's not my expertise, that's not my area, but I can recommend an advisor who knows about that.” Most of Ellenbogen's clients are environmentalists. “Many of them drink and smoke, and so don't care about that [as a negative factor],” he says. But he avoids investors who are into green only because it's hot. “They'll be on to something else next year,” he says.

Meanwhile, advisors should keep in mind that even SRI funds with similar emphases can have very different standards. While one green fund shuns oil stocks, another may own them. Standards can also vary among religious funds that claim to uphold the same faith. In 2006, Ave Maria Catholic Values sold 3M and American International Group because the companies began offering benefits to unmarried partners of employees. Meanwhile, LKCM Aquinas Growth, a Catholic fund that avoids companies involved with abortion, owns Microsoft, which provides benefits for unmarried partners.

In some cases, funds have changed their standards over time. For years, Pax avoided Treasury bonds because they are used to fund defense spending. But this year, the Pax board voted to permit investments in Treasuries, reasoning that the bonds also finance food stamps and environmental protection programs.


Some advisors have been reluctant to use social funds, fearing they would underperform. Because they must screen out undesirable stocks, social funds may be saddled with extra research expenses, critics argue. In fact, the evidence on fees and returns is mixed. The average large-blend fund tracked by Morningstar has an expense ratio of 1.27 percent, compared to 1.10 percent for the average socially responsible fund in the large-blend category.

Academic studies have shown that conventional funds do not outperform social funds over long periods. But the reality is that many social funds tend to do best when growth stocks are in favor. In the growth-oriented rally of the 1990s, many social funds outdid their conventional competitors. Since value stocks have led in this decade, conventional funds gained an edge; during the 10 years ending in May, conventional large-blend funds returned 4.39 percent, compared to 4.17 percent for social funds. The growth bias of social funds can be attributed to their screening techniques. Because of their focus on the environment and healthy living, many funds avoid some value stocks, including smokestack industries and energy companies. Typical social funds focus on traditional growth names, such as technology and health, which may not be major polluters.

Or consider the Amana Growth fund. During the first five months of this year, Amana Growth avoided financial stocks completely — a move that enabled the fund to outdo more than 95 percent of its large-growth peers. Does the portfolio manager deserve applause for a brilliant sector play? Not necessarily. A socially responsible fund that invests according to Islamic principles, Amana always shuns companies that collect interest, a practice forbidden by the Koran. “Of the 5,000 stocks in our universe, we have to eliminate half for Islamic purposes,” says portfolio manager Nicholas Kaiser.


Despite concerns about returns, socially responsible funds have lately moved into the mainstream, reaching many shareholders who include technology entrepreneurs and others with high net worths. “These clients are very interested in their investments,” says Cheryl Smith, executive vice president of Trillium Asset Management Corporation, a Boston money manager. “By offering portfolios of social investments, financial advisors can provide something that people can't just get by dialing an 800 number.”

Over the years, the screens used by social funds have evolved. In the 1980s, funds simply eliminated firms that were objectionable to clients, including defense contractors and tobacco companies. More recently, social analysts have begun attempting to make more subtle calls. Instead of eliminating all oil companies, social funds seek to own the best in the industry: companies that are moving to control emissions and operate more efficiently.

Pax World Mutual Funds used to avoid oil companies, but lately it has been holding energy giant BP and other fossil fuel stocks. “BP is the number one investor in alternative energy in the world,” says Joe Keefe, president of Pax World Management Corporation. “We are trying to find responsible companies that are leaders in making social progress.”

Increasingly, funds have focused on a broader range of issues, such as diversity in the workplace and the use of sweatshops overseas. This has led some critics to charge that social funds use uncertain standards. After all, it is hard to judge precisely whether a company treats women fairly. Keefe of Pax World concedes that no exact measures exist, but he argues that social funds are improving their screening methods. In recent years, companies have begun reporting more data related to social issues, such as greenhouse gas emissions and the diversity of corporate boards, says Keefe. That has provided more material for analysts at social funds. “After they go through all the financial data, conventional portfolio managers must make judgment calls about whether to buy a stock,” he says. “The same is true of social research analysts. In the end, we must make judgments about which companies are doing the most to protect the environment or improve corporate governance.”

More and more, investors can get investments that are finely tailored to their interests. Advisors should be prepared to discuss the full range of options.


Build a diversified portfolio with top-performing socially responsible funds.

Fund Ticker Three-Year Return Five-Year Return % Rank Category 5-Year Return Maximum Front-End Load
LKCM Aquinas Value AQEIX 9.7% 12.3% 10% 0%
Neuberger Berman Socially Responsive NBSRX 10.2 11.6 14 0
New Covenant Growth NCGFX 7.9 10.0 36 0
Parnassus Equity Income PRBLX 11.2 9.9 39 0
Sentinel Responsible Core Opportunities MYPVX 7.0 10.2 33 5.00
Timothy Plan Large/Mid Value A TLVAX 16.2 15.9 3 5.50
Amana Growth AMAGX 14.8% 18.6% 2% 0%
American Trust ATAFX 9.4 10.8 27 0
Iman K IMANX 11.8 11.2 23 0
LKCM Aquinas Growth AQEGX 6.9 8.9 59 0
Spectra Green N SPEGX 15.9 13.6 7 0
Amana Income AMANX 16.0% 17.9% 1% 0%
AXA Enterprise Socially Responsible A EGSAX 7.3 9.7 56 4.75
Winslow Green Growth WGGFX 12.4% 15.9% 7% 0%
Calvert Social Bond A CSIBX 4.0% 4.7% 5% 3.75%
LKCM Aquinas Fixed Income AQFIX 3.4 3.2 47 0
Parnassus Fixed-Income PRFIX 5.4 3.7 25 0
Green Century Balanced GCBLX 4.6% 8.1% 47% 0%
Pax World Balanced PAXWX 8.1 9.4 23 0
Timothy Plan Conservative Growth A TCGAX 8.5 8.6 36 5.50
World Stock New Alternatives NALFX 22.5 19.8 6 4.75
Portfolio 21 PORTX 14.2 15.2 51 0
Source: Morningstar. Returns through 5/31/08.
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