Social values funds grow

Socially responsible funds, and the ideals behind them, are becoming more mainstream, but building a truly diversified portfolio with them remains a challenge.

The realm of socially responsible investment funds is a niche that is still growing – in fact, at a faster pace than the mutual fund world as a whole, according to Morningstar Inc. But one of the things that can make it a confusing area for investors is the wide diversity of values SRI funds attempt to incorporate. And since the majority are fairly small in terms of assets, bargain hunters may not be thrilled with their fees.

Still, those who believe in the idea of looking beyond the basics of the balance sheet say screening for good environmental, social and governance citizenship bears rewards.

“If a company has been thoughtful about the impact they have on the environment, chances are they’ve also been thoughtful about how they treat their employees,” said Matthew Patsky, co-manager of the Winslow Green Growth Fund, (WGGFX) one of the few small-cap SRI offerings. “There’s growing evidence, and broadening acknowledgment, that these kinds of nonfinancial issues are important to long-term performance.”

Among large-cap domestic equity, a fair number of choices are available. One of the biggest SRI fund shops is the Calvert Group, which screens its holdings according to social criteria, eliminating alcohol, tobacco, gambling, and weapons companies, as well as firms with poor environmental and labor practices. Among its funds is the Calvert Social Investment Equity (CSIEX), which has developed a good record under manager Dan Boone. But despite substantial asset gains, the fund’s expense ratio has remained a relatively high 1.24 percent.

Among faith-based shops, one of the best known is the Ave Maria Funds, which seek to incorporate Catholic values, and “pro-life and pro-family beliefs.” Toward that end, Ave Maria screens out companies connected with abortion, pornography or that offer non-marital partner benefits to their employees.

What gets screened out depends on the church. New Covenant Funds, affiliated with the Presbyterian Church, uses broad screens to avoid alcohol, tobacco, gambling and certain elements of defense – specifically, companies highly dependent on military contracts and those that develop weapons that kill indiscriminately, such as nuclear weapons, land mines and chemical weapons. The idea is to avoid anything that can hurt noncombatants in a war, said George Rue, New Covenant’s chief investment officer. And like many SRI funds, New Covenant isn’t afraid of a little shareholder activism.

“We’re not against a proper defense of our country,” Rue said. “But we’re trying to have some level of control. … We’re trying to avoid a heavy business sending military products to foreign countries, and indiscriminate weapons. We want to be a voice out there saying we want those things reduced.”

Part of the reason it’s difficult to create an all-SRI portfolio is that there are only a handful of pure international SRI funds, said Greg Carlson, a fund analyst at Morningstar.

“The SRI investing world is still relatively new. A lot of firms are still trying to establish a good track record in domestic small caps and mid caps,” Carlson said. “It requires a ramping up on the social research side, as well. And with some overseas companies, you see less transparency than you do domestically.”