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Portfolio > Mutual Funds

First "Green" Fund Turns 30

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The underperformance myth has been busted,” says Steven Schueth, president and chief marketing officer of First Affirmative Financial Network, an independent investment advisory firm specializing in socially responsible investing. “The belief that you automatically have to give up return if you want to invest in a socially or environmentally responsible manner is simply not valid.”

Schueth, Thomas Grant, president of Pax World Funds, and Anita Green, director of social research for Pax World Funds, came together in Manhattan recently to mark the 30th anniversary of the launch of the Pax World Balanced Fund.

The Balanced Fund’s existence is due largely to two friends, Luther Tyson and Jack Corbett, both Methodist ministers. The pair were working on peace, housing, and employment issues for the Board of Church and Society of the United Methodist Church in 1967 when Tyson received a letter from a woman in Ohio. She asked, “Is there a mutual fund which will manage my pension money without investing in war-related industries?” To his surprise, Tyson discovered there were no such funds, and while he resumed his work, the idea for such a fund stuck with him.

A year later, Tyson was in France as part of a delegation monitoring the Paris Peace Talks, which negotiated an end to the Vietnam War. On the flight home, he decided it was time to create a fund for that woman in Ohio and other investors like her.

Neither Tyson nor Corbett had experience in starting or running a mutual fund. After various failed attempts to get a fund manager to run such a fund, the duo turned to two brothers from Portsmouth, New Hampshire: Paul Brown, a lawyer, and Anthony Brown, a businessman, to help them organize the fund.

In 1971, there were only 280 mutual funds in existence. The Pax World Balanced Fund became the first fund in the U.S. to screen for socially and environmentally responsible companies on August 8, 1971.

According to a report conducted for Pax World Funds by Wiesenberger, the growth of socially responsible mutual funds has flourished since then.

Over the last three decades, the assets of SRI funds grew five times faster than all other funds, from $150 million in SRI assets at year-end 1971 to $1.2 billion in mid-2001, according to Wiesenberger. The number of SRI funds grew twice as rapidly as other funds over the same period, from two funds in 1971 to 192 such funds.

The growth in SRI assets has largely tracked that of other funds in recent years. The surge in the assets of SRI funds and all other funds has remained relatively close over the last 10 years–392% for SRI funds versus 410% for all other funds, according to Wiesenberger. This comparison is instructive because it shows that SRI funds did not just have an enormous surge in the 1970s and then die out.

The report concludes with the observation that the concerns of social investors have evolved substantially since the days when SRI investment dealt mainly with that Ohio woman’s concerns with “war-related” stocks and South African related-stocks in the 1970s and ’80s. In recent years, SRI has grown to embrace workplace and sweatshop concerns and environmental issues. The notion of sustainability, the ability to grow and expand under current conditions without destroying or depleting natural resources or polluting the environment, has become a major focus as well.

So what has fueled the growth of socially responsible investing? “First, investors are so much better informed today,” says Schueth. “The better informed investors are, the more responsible their actions tend to be.”

Second, Schueth argues, is the baby-boomer generation that came of age in the 1960s. “Our revolutionary ideas for creating a better, more just, and sustainable society have taken root and are beginning to blossom,” Schueth says. The final part of the equation lies with women. “As women have moved out of the home and into the workforce . . . they have brought a natural affinity to the concept of socially responsible investing,” Schueth says. “Research has consistently shown that nearly 60% of shareholders in socially screened mutual funds are women.”

What Difference Does It Make?

Is there evidence that socially responsible investing influences corporate behavior? “In terms of evidence, one thing you could look at is annual reports,” Green argues. “Ten to 15 years ago when you looked at any company’s annual report it was largely filled with financial data. Today, most any annual report you see is going to talk about community giving programs and recycling programs. Companies are including this information in reports because they know people are looking to see it.”

What kinds of trends have SRI’s been following? “We have seen a lot of new religious funds come on the scene in the last three years; funds like Catholic and Islamic funds,” says Grant. “They are joining the Methodist and Lutheran funds that have been around for a long time. The Methodists have been managing assets in what we now call socially screened assets for 200 years in this country. We have seen a lot of new players. For example, Morgan Stanley is coming out with a new socially responsible fund.”

While SRI funds look for companies that make attempts to improve quality of life, there has been a counter movement in the form of funds for investors interested in such “sin” stocks as missile defense systems and tobacco companies like Philip Morris and RJ Reynolds. “This counter movement from the conservative side has seen the formation of an all-defense fund,” notes Schueth. “There is a fund called Morgan FunShares which invests fully in sin stocks.”

While in the 1970s SRI’s may have been thought of as funds for protesters, Schueth notes that today SRI’s have a much broader political base. “From a political standpoint, what we find is that socially responsible, socially conscious investors tend to be more progressive from the standpoint of social issues, and tend to be pretty conservative when it comes to fiscal issues, so from a political standpoint it plays from the middle,” Schueth observes.

The idea may persist among many that SRI investing entails sacrificing the best possible return for principle’s sake, but Grant argues that SRI entails more than that. “Part of the myth was that in screening you limit your universe of potential investments. If you look through the SRI universe of funds, there is every kind of fund you could want. All the disciplines are covered,” Grant notes. “In the global corporate world, if there are 20,000 corporations and we screen out 20%-25% of them, it [still] leaves an enormous universe.”


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