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If everyone is working so hard, why are they always at lunch?
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Rich pickings, sour grapes
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(06/19/98)
Get them while they're young
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Money managers are targeting children as the next growth market
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Mad about Steve Madden
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Wall Street loves this low-end shoemaker -- and so do fashion-conscious young women
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Finding the g(ive) spot
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In the increasingly competitive quest for dollars, charity organizations are looking for ways to find that magic motivational appeal
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SOCIALLY RESPONSIBLE MUTUAL FUNDS CLAIM TO HELP YOU DO GOOD WHILE DOING WELL, BUT ARE THEY JUST TRYING TO SELL YOU A BILL OF GOODS?
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BY HEATHER CHAPLIN
When I inherited a little money some years ago, I decided not to be a greedy pig about the whole thing. Instead of choosing the mutual fund that would have made me a millionaire before my 30th birthday, I chose a nice, socially responsible fund. I figured I could turn a few thousand dollars into a somewhat smaller fortune -- and still pat myself on the back, smug with the knowledge I was also doing some good.
As always in situations where you think you've won on all fronts, there was a catch. Two, actually. One, I didn't make any money, and two, I don't think I did any good.
So I did a little soul-searching. The first question that needed to be answered was, why me? Was I unlucky in some deep way, marked with a stroke from the gods like a swath of insect repellent keeping good fortune from circling too close? It distressed me that a chunk of money left by a relative whose passing had caused no grief had failed to earn a dime at a time when the stock market seemed to be handing out free money to anyone with a wheelbarrow to cart it away.
But perhaps I exaggerated. Perhaps it wasn't my problem but rather the concept of socially responsible investing itself that stank. Was it possible that social consciousness and a hunger for economic advancement simply couldn't be mixed?
I called the Social Investing Forum, a nonprofit association dedicated to the concept. While the spokeswoman declined to comment on whether I was a bulls-eye for the gods, she was willing to go this far: "There are people out there who say socially responsible funds can't perform as well as other funds," she told me, "but that's just not true."
The Social Investment Forum oversees 60 of the nearly 150 socially responsible funds in existence. According to its spokeswoman, "Socially responsible investing is a strategy, not a particular set of values." The term simply refers to mutual funds that screen companies based on social criteria rather than strictly financial ones. The most commonly screened companies, in order, are those dealing in tobacco, gambling, weapons, alcohol, birth control or abortions. Bringing up the rear are companies with poor environmental, labor, human rights and animal welfare records.
Sounds very 1990s, you say, very PC, very unbleached cotton and organic vegetables. But actually, the concept has been around since the late 1700s, when Americans refused to invest in "sin" companies, those that produced tobacco and alcohol or housed gaming establishments. (These roots perhaps help explain the puritanical rather than progressive overtone to most of the criteria.)
The concept waned over the years and then re-emerged in the 1980s as a component of the anti-apartheid movement. Investors -- as well as student and activists -- pressured companies to divest their holdings in South African companies, and some, including Nelson Mandela, say the subsequent defeat of the apartheid system was in part caused by this movement.
The recent explosion of anti-tobacco sentiment gave the movement another boost, and it's now estimated that $1 trillion is invested in socially responsible portfolios. That's an 85 percent increase since 1995, according to the Social Investment Forum.
Since many of these funds are only a few years old, accurately gauging the overall success of the movement is difficult. Some funds have far exceeded anyone's expectations, while others, like mine, simply reek.
In 1991, Kinder, Lydenberg, Domini, a Cambridge, Mass.-based financial firm, decided to put the concept to the test. The firm set up the Domini 400, a market capitalization-weighted common stock index modeled on Standard & Poor's 500 -- a benchmark of U.S. stock performance. They started with the companies in the S&P 500. They then cut those companies that didn't meet their social standards, replacing them where possible with companies in the same industry that had better social records. This left Domini with 400 companies.
Since its inception, the Domini 400 has consistently outperformed the S&P -- no easy task. The Domini Social Equity Fund, which mirrors the Domini 400, reported 1997 returns of 36.02 percent, compared with the S&P's 33.36 percent. Its three-year returns also beat the S&P by just less than a percentage point.
During the Domini 400's planning stages, some observers thought it would prove once and for all that socially responsible investing couldn't cut the mustard. In fact, it proved just the opposite, maintains Jon Hale, a stock analyst at the financial research company Morningstar who has written extensively about socially responsible investing. He said Domini's success proves it is possible to make a profit through socially screened funds.
Making a profit, though, is not the same as making the maximum profit. Whether feel-good funds offer opportunities equivalent to those of their nonscreened brethren is another question altogether. Hale suggests looking at how particular funds rank within their investment category -- which contains both screened and nonscreened funds.
Morningstar ranked the three biggest socially screened growth funds like this:

Dreyfuss Third Century, delivering a total three-year return of 114.75 percent, is in the top 21 percent of all large cap growth funds.
Domini Social Equity, the second largest screened growth fund, is in the top 8 percent of large cap blend funds.
And the volatile Parnassus, bringing up the rear not only in terms of assets but also profits, landed itself in the bottom 99 percentile of small cap value funds. It brought investors a total three-year return of 17.78 percent.

Morningstar found that socially screened funds do tend to lag behind their counterpart nonscreened funds. (It looked at the 42 funds that have track records of at least three years.) Hale pointed out, though, that the portrait was skewed thanks to one family of 10 underperforming funds, the Calvert Group. Sans Calvert Group, the socially responsible universe suddenly looks a lot more like the nonscreened universe: some excellent funds, some terrible funds and a lot of decent funds.
According to Lloyd Kurtz, a research analyst in San Francisco, it doesn't make a whole hell of a lot of difference -- financially, that is -- whether a fund is socially screened or not. He points to the many companies that don't peddle booze, tobacco or gambling and have neutral environmental records but have skyrocketed in the 1990s. The important thing, he said, was for a fund to have a good portfolio and be intelligently managed.
Last year Kurtz published a study of eight money managers who oversaw both screened and nonscreened growth portfolios. The results showed no statistical difference between the two universes. Kurtz cautions, however, that socially screened funds may not always do as well as they have in the 1990s. Companies traditionally frowned upon by do-good investors -- like oil, mining or military -- could take over as stock market leaders in the future.
"Don't assume socially responsible investing can always outperform," Kurtz told me, "but my theory is it probably doesn't make a difference."
So it seems as if investors with one eye on their profits and one on their conscience at least stand a fighting chance. Now, if I could only get the gods to give me a chance.
SALON | July 3, 1998
Heather Chaplin is a freelance business writer in San Francisco. Her Reluctant Capitalist column appears on alternate Fridays in Salon.




T A B L E__T A L K Five gallons of gas for a buck. Ice cream for a nickle. Remember the prices of yesteryear and discuss inflation in the Business and Personal Finance area of Table Talk R E C E N T L Y Swamped By Todd Pitock If everyone is working so hard, why are they always at lunch? (06/26/98) Rich pickings, sour grapes By Linda Tischler A mother envies her daughter's lucrative entrance into the world of work (06/19/98) Get them while they're young By Kevin Kelleher Money managers are targeting children as the next growth market (06/12/98) Mad about Steve Madden By Heather Chaplin Wall Street loves this low-end shoemaker -- and so do fashion-conscious young women (06/05/98) Finding the g(ive) spot By Kevin Kelleher In the increasingly competitive quest for dollars, charity organizations are looking for ways to find that magic motivational appeal (05/29/98) - - - - - - - - - - - - - - - - Browse the Money archives		___Pot of gold or PC money pit? SOCIALLY RESPONSIBLE MUTUAL FUNDS CLAIM TO HELP YOU DO GOOD WHILE DOING WELL, BUT ARE THEY JUST TRYING TO SELL YOU A BILL OF GOODS? - - - - - - - - - - - - - BY HEATHER CHAPLIN When I inherited a little money some years ago, I decided not to be a greedy pig about the whole thing. Instead of choosing the mutual fund that would have made me a millionaire before my 30th birthday, I chose a nice, socially responsible fund. I figured I could turn a few thousand dollars into a somewhat smaller fortune -- and still pat myself on the back, smug with the knowledge I was also doing some good. As always in situations where you think you've won on all fronts, there was a catch. Two, actually. One, I didn't make any money, and two, I don't think I did any good. So I did a little soul-searching. The first question that needed to be answered was, why me? Was I unlucky in some deep way, marked with a stroke from the gods like a swath of insect repellent keeping good fortune from circling too close? It distressed me that a chunk of money left by a relative whose passing had caused no grief had failed to earn a dime at a time when the stock market seemed to be handing out free money to anyone with a wheelbarrow to cart it away. But perhaps I exaggerated. Perhaps it wasn't my problem but rather the concept of socially responsible investing itself that stank. Was it possible that social consciousness and a hunger for economic advancement simply couldn't be mixed? I called the Social Investing Forum, a nonprofit association dedicated to the concept. While the spokeswoman declined to comment on whether I was a bulls-eye for the gods, she was willing to go this far: "There are people out there who say socially responsible funds can't perform as well as other funds," she told me, "but that's just not true." The Social Investment Forum oversees 60 of the nearly 150 socially responsible funds in existence. According to its spokeswoman, "Socially responsible investing is a strategy, not a particular set of values." The term simply refers to mutual funds that screen companies based on social criteria rather than strictly financial ones. The most commonly screened companies, in order, are those dealing in tobacco, gambling, weapons, alcohol, birth control or abortions. Bringing up the rear are companies with poor environmental, labor, human rights and animal welfare records. Sounds very 1990s, you say, very PC, very unbleached cotton and organic vegetables. But actually, the concept has been around since the late 1700s, when Americans refused to invest in "sin" companies, those that produced tobacco and alcohol or housed gaming establishments. (These roots perhaps help explain the puritanical rather than progressive overtone to most of the criteria.) The concept waned over the years and then re-emerged in the 1980s as a component of the anti-apartheid movement. Investors -- as well as student and activists -- pressured companies to divest their holdings in South African companies, and some, including Nelson Mandela, say the subsequent defeat of the apartheid system was in part caused by this movement. The recent explosion of anti-tobacco sentiment gave the movement another boost, and it's now estimated that $1 trillion is invested in socially responsible portfolios. That's an 85 percent increase since 1995, according to the Social Investment Forum. Since many of these funds are only a few years old, accurately gauging the overall success of the movement is difficult. Some funds have far exceeded anyone's expectations, while others, like mine, simply reek. In 1991, Kinder, Lydenberg, Domini, a Cambridge, Mass.-based financial firm, decided to put the concept to the test. The firm set up the Domini 400, a market capitalization-weighted common stock index modeled on Standard & Poor's 500 -- a benchmark of U.S. stock performance. They started with the companies in the S&P 500. They then cut those companies that didn't meet their social standards, replacing them where possible with companies in the same industry that had better social records. This left Domini with 400 companies. Since its inception, the Domini 400 has consistently outperformed the S&P -- no easy task. The Domini Social Equity Fund, which mirrors the Domini 400, reported 1997 returns of 36.02 percent, compared with the S&P's 33.36 percent. Its three-year returns also beat the S&P by just less than a percentage point. During the Domini 400's planning stages, some observers thought it would prove once and for all that socially responsible investing couldn't cut the mustard. In fact, it proved just the opposite, maintains Jon Hale, a stock analyst at the financial research company Morningstar who has written extensively about socially responsible investing. He said Domini's success proves it is possible to make a profit through socially screened funds. Making a profit, though, is not the same as making the maximum profit. Whether feel-good funds offer opportunities equivalent to those of their nonscreened brethren is another question altogether. Hale suggests looking at how particular funds rank within their investment category -- which contains both screened and nonscreened funds. Morningstar ranked the three biggest socially screened growth funds like this: Dreyfuss Third Century, delivering a total three-year return of 114.75 percent, is in the top 21 percent of all large cap growth funds. Domini Social Equity, the second largest screened growth fund, is in the top 8 percent of large cap blend funds. And the volatile Parnassus, bringing up the rear not only in terms of assets but also profits, landed itself in the bottom 99 percentile of small cap value funds. It brought investors a total three-year return of 17.78 percent. Morningstar found that socially screened funds do tend to lag behind their counterpart nonscreened funds. (It looked at the 42 funds that have track records of at least three years.) Hale pointed out, though, that the portrait was skewed thanks to one family of 10 underperforming funds, the Calvert Group. Sans Calvert Group, the socially responsible universe suddenly looks a lot more like the nonscreened universe: some excellent funds, some terrible funds and a lot of decent funds. According to Lloyd Kurtz, a research analyst in San Francisco, it doesn't make a whole hell of a lot of difference -- financially, that is -- whether a fund is socially screened or not. He points to the many companies that don't peddle booze, tobacco or gambling and have neutral environmental records but have skyrocketed in the 1990s. The important thing, he said, was for a fund to have a good portfolio and be intelligently managed. Last year Kurtz published a study of eight money managers who oversaw both screened and nonscreened growth portfolios. The results showed no statistical difference between the two universes. Kurtz cautions, however, that socially screened funds may not always do as well as they have in the 1990s. Companies traditionally frowned upon by do-good investors -- like oil, mining or military -- could take over as stock market leaders in the future. "Don't assume socially responsible investing can always outperform," Kurtz told me, "but my theory is it probably doesn't make a difference." So it seems as if investors with one eye on their profits and one on their conscience at least stand a fighting chance. Now, if I could only get the gods to give me a chance. SALON \| July 3, 1998 Heather Chaplin is a freelance business writer in San Francisco. Her Reluctant Capitalist column appears on alternate Fridays in Salon.