Socially conscious investors' choices sparse

Dollars & Sense

October 26, 2003|By William Samuel Rocco | William Samuel Rocco,MORNINGSTAR.COM

Fans of socially responsible investing have traditionally been unable to achieve the level of portfolio diversification that most fund investors take for granted.

We pointed out three years ago that nearly all of the attractive offerings that screen for social criteria were large-growth or large-blend funds, and we suggested that SRI aficionados consider unscreened offerings for the smaller-cap and value portions of their domestic portfolios. And last year we noted the paucity of fetching overseas screened funds and urged SRI fans to be flexible while shopping for international offerings.

Not much has changed since. There are more SRI funds than ever, but large-growth and large-blend funds still dominate. Sixty percent of the screened domestic-equity funds are large-growth or large-blend offerings, and most of the socially conscious allocation offerings, which also can serve as core holdings, focus their equity assets on the same sort of issues.

What's more, the vast majority of compelling socially conscious funds continue to be blue-chip growth or blend vehicles, including Vanguard Calvert Social Index (VCSIX), TIAA-CREF Social Choice Equity (TCSCX) and PAX World Balanced (PAXWX).

The first, which tracks the large-growth-oriented Calvert social index and levies an annual expense ratio of just 0.25 percent, has posted impressive relative returns since opening in early 2000. The second, which follows a large-blend-oriented passive strategy, has posted solid results during its 3 1/2 -year history and boasts a 0.27 percent expense ratio.

Though not as cheap as those index offerings, PAX World Balanced is reasonably priced, has earned strong returns with moderate risk over the past decade and has been selected as one of our Analyst Picks in the moderate-allocation category.

But there still aren't many good options for socially conscious investors in the value or smaller-cap categories.

Companies in typical growth sectors, such as technology, health care and services, tend to have relatively few problems with environmental screens, while those in popular value sectors, such as industrial materials, energy and utilities, often have significant pollution issues, so socially conscious offerings have a natural growth bias.

Smaller-cap options are few because it's easier to make environmental, employment and other social judgments on blue-chip companies than it is on smaller ones.

Several of the relatively few value and smaller-cap SRI funds that exist have disappointing records or other problems such as high costs. Citizens Emerging Growth Standard (WAEGX), for example, has lagged behind 75 percent of its mid-growth peers over the past three years, has seen a handful of management changes and has a 1.95 percent expense ratio.

Two socially conscious offerings deserve the attention of investors who own one of the good large-growth or large-blend screened offerings and are seeking domestic diversification.

Ariel Fund (ARGFX) has gained an average of 13 percent a year and has outpaced 78 percent of its small-value rivals over the past decade by pursuing small- and mid-cap names that are selling at substantial discounts to their intrinsic values and have strong franchises, sound balances sheets and other attributes.

Moderate volatility, reasonable expenses and a talented, seasoned manager, John Rogers, add to its appeal. Rogers' midblend Ariel Appreciation (CAAPX), is similarly attractive and similarly run, albeit with a larger average market cap.

SRI fans who are intent on obtaining fairly balanced domestic-equity exposure should continue to remember that tech, health care and services companies tend to have relatively few environmental and other social problems. That means that unscreened mid- and small-growth funds that are particularly heavy on those sorts of issues, such as Analyst Pick Turner Midcap Growth (TMGFX), are unlikely to conflict with their social criteria too much. (The enhanced growth bias of such funds increases risk.)

SRI aficionados should remember that unscreened small- and mid-value funds that load up on fallen-growth stocks or financial names will complement their core large-growth or large-blend funds nicely without running roughshod over their environmental and other beliefs. Analyst Pick Weitz Value (WVALX), which favors media, telecom and financial names, fits that bill.

Finally, socially conscious investors who want overseas exposure need to be particularly open-minded. All seven international SRI funds have flaws, such as a poor risk-reward profile, a high expense ratio or a global mandate (which translates into a hefty U.S. stake and substantial overlap with most core domestic holdings).

Therefore, such investors should seriously consider taking advantage of the fact that growth-oriented funds tend to be reasonable SRI choices.

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