A New Approach To Managing Socially Conscious Mutual Funds

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The Total Social Impact Foundation Inc. has developed .

Rather than excluding companies from a portfolio completely because they sell tobacco or have bad environmental records, the Cincinnati nonprofit organization uses public information to rate the success of all companies in the S&P 500 stock index at serving eight groups of stakeholders: customers, employees, investors, suppliers, competitors, the community, the environment and society as a whole.

Portfolio managers at Summit Investment Partners L.L.C., Cincinnati, a unit of Union Central Life Insurance Company, calculate a social impact multiplier by dividing each S&P 500 companys social impact score by the median S&P 500 score, then use the social impact multiplier to determine how much of each companys stock to own.

“We own every company in the S&P 500, but reweight them,” says Stephen Dillenburg, who is vice chairman of the Total Social Impact Foundation and manager of the Summit Total Social Impact fund portfolio.

Dillenburg says the weighting approach gets around some of the problems associated with the traditional emphasis on screening out “sin stocks.”

For one thing, Dillenburg says, “you and I might be of different faiths.”

Two investors who disagree about the morality of selling alcohol or tobacco might have a far easier time agreeing on the statement that companies ought to treat employees fairly, he says.

Dillenburg also argues that the use of public information, rather than the proprietary survey data collected by many traditional socially conscious fund managers, might be a healthier approach to socially conscious investing.

By using public data, “we are encouraging transparency of information,” he says.

Dillenburg, an Air Force veteran and fund management veteran, proposed the social weighting concept to Larry Pike, then Union Central chairman, in the late 90s.

Pike supported the proposal, Dillenburg says, because he agreed that companies should try to do right by all their stakeholders, not simply the stakeholders interested in the latest earnings-per-share figures. Union Central acted on Pikes convictions in December 2000, by seeding the new, socially weighted S&P 500 stock index fund with $5 million.

Funds often have trouble gaining much traction before they celebrate their fifth birthday and get their stars from Morningstar Inc.

The Summit social impact fund has had a particularly hard time because it was started when U.S. stocks were peaking.

Fund managers want the fund to mimic the performance of the S&P 500, and the fund has succeeded better than its investors might have liked. The S&P 500 index has dropped 27% this year, and the Summit social impact fund has lost about 26% of its value, reducing its asset base to $3.7 million.

But Dillenburg argues that, in the long run, the social impact scores can provide data that will maximize portfolio financial performance.

His foundations S&P 500 social impact scores tend to range from a low of 6 for companies that have obvious problems with corporate citizenship, to a high of 15.5. The median is about 11.

Dillenburg says most of the companies that have experienced messy meltdowns over the past year have had social impact scores ranking them in them bottom 25% of the S&P 500.

Companies that suffer meltdowns often earn low social impact scores because they lack independent boards or pay excessive compensation to top executives, he says.

Dillenburg estimates that problems with the issues his foundation lumps under the “Trust and Transparency” benchmark could be responsible for more than 20% of the recent decline in the value of the S&P 500 stocks.

The Total Social Impact Foundation is now completing its third set of social impact scores. Because the company has tinkered with the rating formulas, making year-to-year score comparisons is difficult. But the foundation is now trying to emphasize a more consistent approach to the computations, so that investors, researchers and others can see how the social impact scores are changing, Dillenburg says.

Traditional social screening systems tend to exclude important categories of companies from the results databases, Dillenburg says.

The Total Social Impact approach generates data that could prove to be more useful for many researchers, because it creates a database that includes information about every stock and every industry in the S&P 500, he says.

So far, Summit is the only fund company that has a license to use the foundations social impact scores to manage mutual funds. Other fund managers that wanted to use the scores would have to negotiate their own licenses, Dillenburg says.

But he says the widespread availability of social impact scores could eventually change the way many money managers do business.

Today, even when investors and money managers might like to take social concerns into consideration, “the capital markets dont do a very good job of filtering that into their investment decisions,” Dillenburg says.

Eventually, though, companies that try to consider the needs of all their stakeholders ought to outdo companies that focus on short-term growth in earnings per share, Dillenburg says.

A July report issued by the Social Investment Forum, Washington, a trade group for organizers of socially conscious funds of all kinds, supports the idea that social consciousness can correlate with superior investment returns.

Fund performance statistics that the forum bought from an independent research firm show socially conscious funds increased their assets 3% during the first half of the year, while assets at other U.S. diversified funds decreased 9.5%.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 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.