Socially responsible funds can help you get rich, too

Mutual Funds

March 02, 1997|By Jerry Morgan | Jerry Morgan,Los Angeles Times

Sporting goods manufacturers get together to say they won't buy soccer balls made by children in Pakistan.

The American Medical Association announces a new coalition of 53 mutual funds that don't buy tobacco-related stocks.

"Socially responsible" investing is getting more noticeably mainstream as companies try to protect their reputations, which can affect sales and ultimately the price of their stock.

But if you want another reason to invest in socially responsible products and services, take a look at the Domini social investing hTC index, a group of 400 companies that has outperformed the S&P 500 index since 1991.

Thus, it appears that investors can increase their principal while holding on to their principles.

But it is hard to track funds that practice socially responsible investing. They are not a cohesive group, like financial services funds. Their investment objectives differ.

Some are growth or aggressive growth funds; others, balanced or bond funds.

So their returns will not be the same, and the latter will not perform as well in a bull-pulled market as stock funds.

But that is equally true of funds that invest without screening for tobacco, alcohol, gambling, environmental problems, nuclear plants, weapons systems, labor problems, discrimination, diversity in the workplace and the like.

Some examples:

The Domini Social Equity Fund is a passively managed index fund that has performed somewhat less well than the index of the same name, but only because of its expense ratio. (That, incidentally, is why S&P 500 index funds also underperform the actual index.)

The $600 million Dreyfus' Third Century fund has been around since 1972. It changed managers in 1994 because of poor performance, and has outperformed the S&P 500 since then.

Baltimore's Calvert group, which has eight social investing funds with $1.6 billion in assets, got a 22 percent return last year from its Social Investing Equity growth fund, said Vice President Steve Schueth.

But its Social Investing Strategic Growth fund uses a special risk program, which for the last two years seems to have screened out success.

It is an aggressive growth fund, which uses short-selling, futures and options, but its risk assessment caused it to miss out on the gains of 1995 and most of 1996, Schueth said. The return was 2.94 percent in 1995 and 14.29 percent last year.

Amy Domini, who with her husband, Peter Kinder, has written three books on socially responsible investing, said that 250 of the 400 companies in the Domini Social Equity Fund are S&P 500 companies. The others include a mix of companies that meet their investment criteria and also try to fill in for some industries screened out of the index, such as commodity chemical companies, which fail their environmental criteria.

"We tried to fill in with smaller specialty chemical companies like one that makes chemicals for use in classrooms or another that uses carbon to make pollution filtration systems," she said.

Some of the absolutism of the early days of social investing seems to have given way to a new pragmatic activism.

Eric Steedman, co-manager of the Third Century Fund, said he is more likely now to vote shares in favor of shareholder resolutions to effect change than simply dump a stock.

Domini agrees. "On some issues, we look to the activist leadership for direction," she said. "So, on an issue like divesting companies that do business in Burma, the activists have asked us not to sell but to use our vote to support shareholder resolutions to influence corporate behavior."

And not everyone uses the same screens. While Domini's basic screens include alcohol and gambling, Steedman's don't, he said, because the fund's directors didn't choose to include them.

Third Century also has a smaller universe than Domini -- only 59 stocks, 31 of which are part of the S&P 500 index and 15 that are on S&P's mid-cap index. The fund had a 35 percent return in 1995 and 24 percent last year.

Steedman co-manages the fund with Stephon Jackson, senior vice president of NCM Capital Management Group, a Durham, N.C., investing firm. Steedman looks after the fund's soul; Jackson, its wallet.

"Sometimes we have arguments because I like a company and Eric thinks it won't pass the screens," said Jackson.

Who wins if the company can't pass through the fine mesh in the screens? "Eric does," Jackson said. "That's the way it is set up."

Some companies manage to slip through wider holes in the mesh even with some flaws. McDonald's is one example, Domini said. The company's good works -- including changing its packaging to be more environmentally friendly after shareholder pressure, doing business in minority communities and financing minority entrepreneurs all over the country -- offset some basic environmental concerns, she said.

"Beef, after oil, is one of the major concerns," Domini said. "The wheat to feed one cow can be used to feed 4,000 people. It is a ridiculous use of natural resources."

Some companies get dropped from the social index because actions they take after getting on the list violate basic screens.

For example, the long newspaper strike in Detroit has led Domini to drop both corporate parents, Knight-Ridder and Gannett, because they hired replacement workers.

Pub Date: 3/02/97

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