Some `socially responsible' funds are doing well

Your Funds

April 02, 2000|By CHARLES JAFFE

For years, the people who run social investment funds have wished for a big, mainstream fund company to join their battle.

Now that it's about to happen, however, there's some concern that they should have been more careful in what they wished for.

The Vanguard Group, the world's second-largest mutual fund company, will open the Vanguard Calvert Social Index fund in May, offering a low-cost alternative to what has traditionally been a high-cost segment of the investment world.

In addition, there is a social fund in the works at TIAA-CREF, with several other big fund firms reportedly considering joining the fray. Social investing -- often called "socially responsible investing," although that term implies that all other investors are socially reckless -- revolves around the basic belief that it is possible to "do well" while also "doing good."

To make that happen, social investors weed out companies that act in ways that are not consistent with their individual beliefs. Social screens cover everything from environmental and societal concerns to personal or religious preferences.

So, for example, Calvert's index (and, in turn, Vanguard's new fund) will avoid stocks tied to alcohol, tobacco, gambling, and nuclear power. It also will exclude companies that violate fair labor practices. It's also a safe bet companies that make weapons or have a bad track record on environmental, product safety, and human rights issues will be kept out.

But true social investors go beyond screening out bad actors. They advocate for change and improvement in companies they own and often work to encourage community development and reinvestment, using their influence (and at least some of their profits) to make the world a better place.

Social investing suffered for many years under soggy performance and high costs, which turned off investors who might otherwise have gravitated to the idea.

In recent years, however, that has changed. The Domini Social Index fund, for example, has beaten the Standard & Poor's index for three years running. Last year, 11 of the 16 social funds with $100 million-plus in assets earned top performance marks from both Morningstar and Lipper.

All told, about $2 trillion is invested based on some sort of social or religious screen.

That said, it's not surprising that the big fund firms were getting requests to develop social offerings.

"The goal of socially responsible investors it to get the attention of corporate America," says Douglas Phelps, president of the Green Century funds. "This is like getting the 800-pound gorilla on our side. Vanguard having a social fund will get the attention of corporate board rooms and of individual investors, who may start to feel like they have some power here."

But when that proverbial 800-pound gorilla comes a-calling, it also tends to squish things that get in the way. There is a real question of whether Vanguard truly has a social interest, or if it is just looking to extend its market reach and name brand while grabbing assets in a new arena.

What's more, Vanguard's commitment to social investing may not run any deeper than screening. Vanguard is not pledging to become an active agent for societal change. Calvert (and other social firms) will continue to push for corporate and community changes, but Vanguard is unlikely to take on that role.

In fact, there may come a day when Vanguard's existing funds -- whose agenda is maximizing profits -- are at odds in a proxy vote against a shareholder proposal that its social investors favor. Vanguard officials say only that they will deal with such conflicts when they arise, and that they expect to vote proxies for the new fund in a manner consistent with social investing.

As for community reinvestment, Vanguard's not making a commitment there, either.

In short, Vanguard's new fund may be only "half-social," which is akin to being "a little bit pregnant." Social investing generally is considered an either-or choice, by which you invest in line with your beliefs across the board or not at all.

Without the activism and community reinvestment, social investing is reduced to "personal choice investing," which is not necessarily bad but not the forum for driving social change and debate that the long-time supporters of social investing have been seeking.

"The social investing advocate in me thinks this is the greatest thing that ever happened," says Amy Domini, namesake of the Domini Social Index fund. "But I am an advocate because I believe the way you invest today shapes the world tomorrow. It will be supremely disappointing -- if not actually dangerous to social investing -- if someone of the caliber of Vanguard comes in only half way and confuses the issues."

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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