If investors want to let their conscience be their guide, there are an increasing number of mutual funds that allow them to do just that. Concerned investors, for instance might not want to back a company that makes profits from cigarettes, alcohol, or guns.
“There are now 109 mutual funds that we classify as socially responsible,” says Greg Carlson, fund analyst at Chicago-based mutual fund tracker Morningstar. “They can vary significantly, from one fund to another. Some use what might be considered typical SRI screens, while others follow particular religious values.”
Although funds are by no means unanimous in what constitutes socially responsible investing, some criteria are common. “One traditional set of social screens eliminates ‘sin stocks’ from companies associated with alcohol, tobacco, or gambling,” says Christopher Geczy, assistant professor of finance at The Wharton School of Business at the University of Pennsylvania.
Some SRI funds try to avoid corporate polluters, among other environmental offenders, while some seek companies that practice diversity. Religious funds might include some of the above-mentioned screens in addition to an aversion to companies financing organizations considered to be pro-abortion, for example, or those permitting same-sex unions. Some funds explicitly operate in accordance with Islamic principles.
While socially responsible investing is subjective, there probably is a fund out there for you. But is it possible to invest through SRI funds and still earn substantial returns?
“Definitely,” says Michael Lent, principal, Progressive Asset Management in New York City. “I’ve seen studies
that show SRI funds have done just as well as non-SRI funds, over time. Some SRI funds have exceptional records — Winslow Green Growth Fund (WGGFX), for example, is among the leaders in its category.” This fund has a three-year annualized return of 34%, as of this writing, ranking in the top 6% of small-company growth funds.Lent says that his clients do all of their mutual fund investing through SRI funds, and that they’re happy with the rewards. “You can build a diversified portfolio from funds such as Calvert Large Cap Growth I Fund (CLCIX), Parnassus Fund (PARNX), and Ariel Fund (ARGFX).” (Ariel Capital Management, which operates the fund, is ranked No. 2 on the BE ASSET MANAGERS list with $19.36 billion in assets under management.)
Like other types of funds, not all SRI funds perform well. “The group contains so many different types of funds that you can’t lump them together,” says Carlson. “Of the 75 SRI funds that have records going back at least five years, 37 have outperformed their peers.” To find winning SRI funds, examine the mix of companies a fund holds. Avoid funds with excess concentration in a few areas. “Many SRI funds have been heavy in technology and healthcare, [excluding] industries that might be considered polluters,” says Carlson. He mentions Calvert Social Investment Equity Fund (CSIEX) and Pax World Balanced Fund (PAXWX) as long-term success stories among SRI funds.
Geczy, who has co-written an academic paper, Investing in Socially Responsible Mutual Funds, concludes that SRI funds that limit the choice of companies they buy decrease their returns by 4% to 5%, which he considers a major mistake. In his paper, Geczy argues that by putting 44% of your money into AHA Diversified Equity I Fund (AHDEX), 31% into Domini Social Equity Fund (DSEFX), 19% into Citizens Core Growth Standard Fund (WAIDX), 3% into Columbia Young Investor A Fund (LYIAX), and 3% into Thrivent Large Cap Stock A Fund (AALGX), you can reasonably mimic the Vanguard Total Stock Market Index Fund (a non-SRI fund), with virtually the same returns. This strategy shows that for true believers, SRI funds can be victorious and virtuous.
Socially responsible investment funds
| Fund Name | Ticker | Return* | 3-Year Ann. Total Return* | 5-Year Ann.Total Return* | Initial Investment | Toll-Free Number | Expense Ratio |
| Winslow Green Growth | WGGFX | Small Growth | 38.56 | 26.72 | 9.47 | 888-314-9049 | 5000 |
| Calvert Large Cap Growth A | CLGAX | Large Growth | 13.93 | 15.73 | 5.53 | 800-368-2748 | 2000 |
| Ariel | ARGFX | Mid-Cap Blend | 5.00 | 15.32 | 10.93 | 800-292-7435 | 1000 |
| Pax World Balanced | PAXWX | Mod. Allocation | 8.29 | 10.41 | 4.27 | 800-767-1729 | 250 |
| Domini Social Equity | DSEFX | Large Blend | 4.91 | 8.85 | 0.86 | 800-582-6757 | 2500 |
| Calvert Social Investment Equity A | CSIEX | Large Growth | 5.64 | 8.27 | 2.81 | 800-368-2748 | 1000 |
| Citizens Core Growth Stndrd | WAIDX | Large Growth | 5.42 | 7.84 | -1.92 | 800-223-7010 | 2500 |
| Parnassus | PARNX | Large Growth | 6.45 | 3.65 | -0.82 | 800-999-3505 | 2000 |