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Can You Build an Excellent All-SRI Portfolio?

Your chances are better these days, but it's still a big challenge.

William Samuel Rocco, 12/04/2007

The universe of socially responsible investing funds continues to grow. Eighteen SRI funds have been launched in the past three years, raising the total number of such funds to 68. (Only funds with extensive environmental, health, human rights, or other secular screens are included in these numbers; offerings with religious criteria or limited secular screens are excluded.) What's more, SRI fans have a broader as well as a bigger collection of choices. That's because more than half of the new funds fall in the value, smaller-cap, or international categories--groups that previously had very few strict secular-screened offerings available.

But the universe of SRI funds is still relatively limited. The 18 new SRI funds that have been launched over the past three years pale in comparison to the 1,400 non-SRI offerings that have opened during the period, while the total of 68 SRI funds is a tiny fraction of the 6,800 offerings that exist overall. And the preponderance of SRI funds still follow large-blend, large-growth, or blue-chip moderate-allocation strategies despite the introduction of the new ones that employ value, small-cap, specialty, or international styles.

Thus, although the task is not as daunting as it used to be, investors who wish to build good all-SRI portfolios still face several obstacles. For starters, while they have several fetching options if they want a blend- or growth-oriented core domestic holding, they continue to have a paucity of attractive choices if they prefer a value-oriented one. What's more, SRI fans still don't have very many good supplemental domestic options, and the best overseas options remain unproven. And finally, investors who do succeed in building an all-SRI portfolio are likely to end up with funds that employ a hodgepodge of social criteria, which may make it hard for them to determine if their personal social standards are being met.

Blend- and Growth-Oriented Core Domestic Holdings
Roughly half of the strict secular screened funds are large-blend offerings, large-growth funds, or moderate-allocation offerings that favor mainstream or growth-oriented blue chips. Some of these funds are uninspiring or unproven options, while several others are solid but unexceptional choices.

However, four of these funds make good core domestic holdings. Neuberger Berman Socially Responsive NBSRX has walloped its typical large-blend rival over time as Arthur Moretti has executed his focused strategy quite well. Vanguard FTSE Social Index VFTSX doesn't have a great record at present, largely because its hefty financial stake has stung this year, but this large-blend fund's low costs and its advisor's indexing prowess give it superior long-term prospects. Calvert Social Investment Equity CSIEX has been slowed by its reserved traits in recent years, but it has been much less volatile than the average large-growth fund, and its long-term returns are good. And Pax World Balanced PAXWX has earned one of the best long-term records in the moderate-allocation category as Chris Brown has implemented his wide-ranging growth-oriented strategy deftly.

Value-Oriented Core Domestic Holdings
SRI funds have a tough time following strict value strategies. Their social criteria, particularly their environmental screens, make it difficult for them to purchase many stocks in oil, metals, forest-products, and other traditional value industries. And there are only two secular screened funds in the large-value categories. Neither is a compelling choice. The older one, AXA Enterprise Socially Responsive EGSAX, has a disappointing record and a relatively high expense ratio. The younger one, AHA Socially Responsive Equity AHRAX, has posted unexceptional results since opening in early 2005 and has an unexceptional expense ratio.

Supplemental Domestic Holdings
Four smaller-cap SRI funds have opened in the past three years, bringing the total number of such funds to 13. Three of the new funds have gotten off to slow starts and are moderately to quite pricey, so they're certainly not very attractive options at this point. The fourth new one, Appleseed APPLX, has a fetching expense ratio, a deep and seasoned management team, and other strengths. But this mid-value fund is still less than one year old, and the team has no prior record running a mutual fund, so it is a promising rather than a proven option at present.

The more-established smaller-cap SRI funds are a rather uninspiring lot overall. All but one of these funds suffers from major flaws, such as considerable management turnover, poor performance, or high costs. The sole exception is Winslow Green Growth WGGFX, which has been run by the same lead manager throughout its nine-year history and boasts impressive longer-term returns. That said, it is important to recognize that it is quite risky because of its bold, concentrated style and that it's not cheap (though it is reasonably priced relative to other smaller-cap SRI offerings).

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