John Spence

It Pays to be Good

Socially responsible mutual funds were first introduced in the early 1980s, but until recently their performance has lagged the market. The "sin stocks"- those involved in tobacco, weapons development, nuclear power, and pornography-outperformed socially responsible funds for those who didn't mind profiting from polluting our environment, bodies, and minds. With tech stocks flourishing today, however, socially responsible investors are seeing their returns grow.

Although each fund has different qualifiers for what is considered "socially responsible," most put a high priority on a clean environmental record, a focus on employee relations, workforce diversity, and product safety. The Noah Fund, for example, is a large-cap growth fund based on Judeo-Christian Biblical principles. The Noah Fund shuns new media companies involved in pornography, healthcare companies involved in abortion, and even Disney for its R-rated movies. Well hallelujah, the Noah Fund has gained twice as much as the Standard & Poor's 500 (S&P 500) in the past three years.

With all the choices out there, it is hard for index fund investors with a conscience to determine where they should invest. Here's a sampling of socially responsible index funds for passive investors:

Domini Social Equity and Citizens Index earn 4-star ratings, but these funds have a downside: they're both relatively expensive. Citizens' 1.58% expense ratio is higher than that of most large-cap index funds, and although Domini's 0.98% expenses are lower, they are still above average. Sophia Collier, who runs the Citizens Index, also manages their Small Cap Index. This fund is also expensive. Citizens is charging an expense ratio of 1.55% for the Small Cap Index, which is high when compared to the average small-cap index fund's expense ratio of 0.65%.

As a point of reference, Mutual Funds magazine says that the industry average is 1.53%. According to Lipper, Inc., the expense ratio of the average social fund is 2.00%. Some of the new competitors entering the Socially Responsible fund market are certain to drive this average down.

The recently launched Vanguard Calvert Social Index Fund charges a 0.25% expense ratio for retail shares. Its benchmark will avoid alcohol, tobacco, gambling, and nuclear-power businesses, and it will screen companies for qualities like environmentally sound records and workplace policies. TIAA-CREF has also begun the Social Choice Equity fund, which will have a correspondently minuscule 0.27% expense ratio.

The Walden/BBT International Social Index Fund is the first socially screened fund to track the MSCI EAFE index. The fund will follow the performance of that index, but it will screen out alcohol, tobacco, gambling, and firearm businesses, nuclear-power producers, and companies with poor human-rights records. In addition, the fund's management plans to be an activist shareholder, encouraging companies to improve their environmental and employment practices. Walden also has a domestic Social Index Fund.

Returns through 5/31/2000 (Source: Morningstar, Inc.)

Returns through 6/20/2000 (Source: Morningstar, Inc.)
For now, at least, it is profitable to be good. What remains to be seen is how well socially responsible funds will perform as volatility in the tech sector continues. Rumblings that tech and dot-com companies might not be living up to their squeaky "green" reputations can't be good for socially responsible funds. The fact that Microsoft, a company that admitted to engaging in unscrupulous business strategies to dominate competitors, figures so prominently many socially responsible portfolios, along with union-crushers like Walmart, might also have investors scratching their heads. In the end what constitutes "socially responsible" behavior is as complex as each investor's decision to invest with a social conscience.