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Portfolio > Mutual Funds

Socially Conscious Funds Hold Their Own In The Face Of The Slump

By Allison Bell

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Socially Conscious Funds Hold Their Own In The Face Of The Slump

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“Socially conscious” money managers are hoping recent performance figures will ease the fear that mutual funds might need cigarettes, toxic waste and cheap gin to get through tough times.

Although the recent stock market slump has hit socially conscious managers favorite tech stocks hard, the 76 funds tracked by the Social Investment Forum, Washington, are doing about as well as comparable socially neutral funds.

The latest forum performance figures show that, as of July 30, 54% of the socially conscious funds were beating the S&P 500 stock index.

Socially conscious international and growth funds tended to lag several points behind the benchmarks for all funds in their categories, but many of the socially conscious balanced funds and fixed-income funds beat their benchmarks, according to forum figures.

Bridgeway Fund Inc., Houston, reached the top of the forum list with the Bridgeway Ultra-Small Company fund, a 7-year-old fund with only $52 million in assets.

The fund, which invests mainly in tiny, tobacco-free public companies with fewer than 200 employees, achieved 25.35% growth for the first seven months by backing companies like FTI Consulting Inc., Annapolis, Md., a consulting firm with a strong bankruptcy restructuring arm, according to Bridgeway.

Figures on asset flows are harder to find, but Pax World Management Corp., Portsmouth, N.H., the manager of the biggest, oldest fund on the Social Investment Forum list, the $1.2 billion-asset Pax World Balanced Fund, has been pleased with its investors attitude, according to Anita Green, Pax World social research director.

“We have not seen huge outflows from Pax,” Green says.

Greg Gorvan, president of Money with a Mission/FAFN Inc., Ithaca, N.Y., a fee-only advisory firm, warns against thinking of all socially conscious investors as investors with guts of steel.

“I dont know that theyre any better or any worse” than any other long-term fund investors, Gorvan says. “I dont think their risk tolerance is any different.”

But, in many cases, socially conscious investors seem to take drops in stride simply because they are long-term investors, according to Eric Packer, a registered principal in the Wellesley, Mass., office of Progressive Asset Management Inc., a unit of Financial West Group Inc., Westlake Village, Calif.

“Were not getting a lot of panicked calls,” Packer says.

“We find we get wonderful clients,” says Jack Brill, a registered investment advisor, Natural Investment Services Inc., Paonia, Colo., who has published Investing With Your Values, a guide to socially conscious investing. “They care about other people, they care about the earth. Its not the get-rich-quick guys.”

Socially conscious investing, which is also called “socially responsible investing,” “social screening” and “ethical investing,” has deep roots. Some money managers, church fund managers and pension fund sponsors have always applied social screens to investments.

But the modern socially conscious mutual fund industry began in 1972, when Pax World set up its fund to provide a fund option for investors who wanted to emphasize investments in companies they perceive as doing good things for the world and avoid investments in companies involved in weapons production, liquor, tobacco and gambling.

The boom in liberal socially conscious funds sparked a reactionary boom in the early 1980s in funds that intentionally sought out “sin stocks.” The last survivor of the sin fund class appears to be the $9.4 million-asset Morgan Funshares fund.

Some experts have speculated that a fund specializing in sin stocks would do unusually well in hard times, but the Morgan Funshares net asset value fell 5.5% during the first eight months of the year, according to Morningstar Inc., Chicago.

Meanwhile, total assets in all socially conscious, sin-avoiding funds tracked by Wiesenberger, Rockville, Md., have increased to $103 billion, from $150 million in 1971, according to a study commissioned by Pax World.

Many socially conscious fund managers continue to screen against tobacco, alcohol, weapons, environmental problems and labor abuses, but many are also encouraging investments in companies that fight pollution, lend to the poor, or make other active efforts to improve the world.

Several studies commissioned by Social Investment Forum and other companies and investment organizations have suggested that returns on socially conscious funds are comparable to those on socially neutral funds.

Domini Social Investments L.L.C., King of Prussia, Pa., publishes one of the best-known socially screened stock indices. The index was down 7.3% for the first seven months of the year, while the S&P 500 was down 7.61%.

From 1992 to 2000, the Domini index has beaten the S&P 500 index in four out of nine years, according to Domini figures.

Commissions for producers who work on commission are about the same in the socially conscious fund field as they are in the rest of the fund industry, and training programs and technical support services are also roughly equivalent, Brill and other producers interviewed for the report say.

Although many advisors in the field work on a fee-only basis, the top commission-based advisors do just as well as commission-based advisors who sell socially neutral funds, Brill says.

However, “this is certainly not for the broker who works on volume,” Brill concedes.

But Brill believes the process of getting to know clients social goals as well as their financial needs deepens and strengthens the client relationship.

“Were constantly turning away business,” Brill says. “I havent had to cold call in five years.”

Although the socially conscious fund niche can be as lucrative as any other financial services niche, producers in the field say the most successful fee-based planners and commission brokers are those with an emotional and intellectual commitment to the concept.

Packer, for example, says he was involved in progressive politics for years before he entered the financial services industry.

“I knew that it was a niche I wanted to be involved in,” Packer says.

Green says Pax believes there is still plenty of room for advisors who care about the socially conscious fund market.

“There are not enough financial planners out there to serve all of the clients,” Green says.

One challenge in the socially conscious fund field is hostility from some investment advisors and prospects who object to the concept of socially conscious investing.

The critics argue that the best way to do good for the world is to engage in the most profitable possible legal activities, then spend the profits on charity.

If some activity is so evil that it should be prohibited, citizens should go through the full, democratic legislative process to prohibit, rather than simply voting with their pocketbooks, the critics say.

Another challenge is bare cupboards.

Producers now have enough stock and balanced mutual funds on the shelf to satisfy most clients, but fund companies offer only a handful of socially conscious bond funds and variable annuity contracts, Gorvan says.

Gorvan sees an even bigger gap in the area of term life insurance and other insurance products tied to the issuers general investment accounts.

“There are no insurance companies that have marketed themselves on how they invest their reserves,” Gorvan says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 24, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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