`Do-good' funds doing better these days

Mutual funds

August 15, 1999|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

After years as a weakling sector, "socially responsible" mutual funds are gaining strength. With help from the long-running bull market, many of these "do-good" funds are chalking up quite respectable results, which, in turn, have attracted fresh cash from investors.

Such funds "used to be the province of religious groups and small groups of politically active types," says Eric McKissack, portfolio manager of the Ariel Appreciation Fund, a midcap value fund with a pro-environment bent that has been a solid performer. Now, he says they're becoming "more mainstream."

The funds, which began sprouting in the early 1970s, overlaid a variety of exclusionary screens atop their various investment styles. Early on, many funds ruled out investment in companies with business in apartheid-era South Africa, or in "sin" sectors such as tobacco, alcohol or gambling.

Now, many funds screen companies' track records on the environment, workplace diversity, community involvement, treatment of overseas workers and animal testing, among other issues.

In the past five years, the number of socially screened funds has doubled, to more than 100.

In the first half of this year, socially screened funds attracted $866 million in net new cash, more than double the inflow in the year-earlier period, according to Boston-based Financial Research Corp. And the doubling occurred at a time when net inflows into the nation's entire mutual fund universe slowed by nearly 50 percent.

The sector is still a small slice of the pie. While assets have grown by 60 percent in a year and a half, to $9.5 billion at the end of June, this represents 0.23 percent of the long-term mutual fund world, according to Financial Research.

Still, the growth rates are enviable in a maturing mutual fund industry, and observers say the media and the investing public are picking up on the fact that performance is improving.

"We've finally proven you don't have to give up returns to invest in a socially responsible way," says Paul Hilton, co-manager of the New York-based Dreyfus Third Century Fund, one of the first such funds to be launched in the early 1970s.

Among the evidence of improved performance in the sector is a recent analysis by Jon Hale, a senior consultant with Morningstar Institutional Consulting. He found, for example, that 19.6 percent of socially screened funds with track records of at least three years earned Morningstar's top rating -- five stars -- for risk-adjusted performance as of June 30, double the rate of such designations overall.

"I did a similar study almost two years ago, and I don't think there was a single five-star [socially screened] fund, so they have improved markedly," he says.

A number of factors contributed to the improvement, he says.

For starters, some of the bigger, better-performing funds in the sector invest in large-company growth stocks, which have been the most richly rewarded in this bull market.

Among the powerhouses have been the Domini Social Equity Fund and the Citizens Index Fund, competing funds that each mirror proprietary indexes of large-company growth stocks.

From its launch in 1991 through June 30, Domini has had an annualized total return of 19.72 percent, says Hale, noting that this was just ahead of the 19.64 percent racked up by the Standard & Poor's 500 index, a widely followed market benchmark.

Begun in 1995, Portsmouth, N.H.-based Citizens has an annualized three-year return of 35.7 percent, beating out the S&P 500's return of 29.7 percent for the three-year period that ended July 31.

Nevertheless, mutual fund researcher A. Michael Lipper cautions against reading too much into recent improvement in the performance of the socially screened mutual fund sector.

"You don't have a very long history on most of these funds, and it's mostly been in a bull market led by growth," says Lipper, chairman of fund research firm Lipper Inc. in Summit, N.J.

The $64,000 question is whether the social screens themselves affect performance -- for better or for worse. "Whether social screens actually enhance performance -- and some would argue they are surrogates for company quality -- well, the jury's still out on that," Hale says.

Still, data indicate that investors can get competitive performance from some socially screened funds, he says, "and that is quite a bit different than the conventional wisdom that you are doomed to underperformance because you are limiting the investable universe for nonfinancial reasons."

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