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Find the Right Socially Responsible Fund

A wide variety of options for investing according to your conscience.

David Kathman, CFA, 01/30/2014

Socially responsible investing, or SRI, which avoids or favors certain investments for moral or ethical reasons, has become big business, with an increasingly wide range of options for investors. There are currently around 100 U.S.-based socially responsible mutual funds in Morningstar's database, and that doesn't include a similar number of religiously oriented mutual funds, which screen their portfolios according to religious principles. All these choices can make it tough to sort through all the options, especially since SRI funds can vary quite a bit in the screening criteria they use.

Back in 2007, we surveyed the landscape of religious mutual funds and nonreligious SRI funds. While the broad outlines have remained the same, quite a bit has changed since then, with new funds being launched and others being merged away or liquidated. A little more than a year ago we took an updated look at religious funds, and now it's time for another survey of the secular SRI fund universe.

Socially Responsible Fund Shops
Many of the best-known SRI funds come from shops that specialize in socially responsible investing (also known as ESG investing, for "environmental, social, governance") and make it a central part of their mission. Several of these shops have multiple funds from various asset classes, making it possible to build a diversified socially conscious portfolio. Not only do these fund companies use thorough social screens (both positive and negative), they typically also use shareholder activism and other means to more actively influence companies and invest in nonprofits and other nonpublic companies that promote positive values.

A good example of this type of fund shop is Calvert. Although it does sell several bond funds without social screens, Calvert offers a diverse lineup of more than a dozen different SRI funds, the oldest of which, Calvert Equity CSIEX and Calvert Bond CSIBX, were launched in 1987. Most of these funds use social screens that eliminate alcohol, tobacco, gambling, and weapons stocks while favoring such factors as good environmental records and labor practices. The firm also has three funds (Calvert Emerging Markets Equity CVMAX, Global Alternative Energy CGAEX, and Global Water CFWAX) with more-specialized mandates and less emphasis on screening per se. All of these funds use shareholder advocacy (letter writing, proxy voting, resolutions) in an effort to influence corporate behavior, and this is a particular focus in Calvert Equity Income CEIAX and Large Cap Value CLVAX, which can own companies that don't meet the screening criteria but have the potential to improve. Calvert also uses "social venture capital" to invest in early-stage companies that help solve social problems, and it invests in a nonprofit foundation that promotes community development through such means as small-business loans and microcredit. (More details are available here.)

The other major SRI shops employ similarly wide-ranging methods. The largest individual SRI fund is Parnassus Equity Income PRBLX, which has more than $8 billion in assets and a Morningstar Analyst Rating of Silver. It's one of six funds run by Parnassus Investments, which screens out companies involved with alcohol, tobacco, gambling, weapons, nuclear power, or having business dealings with Sudan. It also favors companies with positive ESG features and does shareholder activism and community investment. (You can read more here.) Other major SRI shops include Domini, whose three funds include Neutral-rated Domini Social Equity DSEFXPax World, whose six funds include the $2 billion Pax World BalancedPAXWX; and Walden, whose five funds include three focused on small- and mid-cap stocks. (Pax World is also the advisor to the four ESG Managers funds, which it runs in conjunction with Morningstar Associates, a unit of Morningstar Inc.'s investment Management group.) All of these shops have funds in various asset classes; each uses similar social screens, both negative and positive; and each actively uses shareholder advocacy and community development to promote its goals. For example, Walden has supported such community development projects as theCalvert Community Investment Note and Boston Community Loan Fund.

There are also a few smaller socially responsible shops with only one or two funds. They include the Bronze-rated Appleseed APPLX, whose big gold stake caused it to trail its peers badly in 2013 despite a solid long-term record; the Boston Common funds (International BCAIX and US Equity BCAMX), both launched since 2010; and several of the alternative energy funds discussed below. One of the more interesting funds in this group is Eventide Gilead ETGLX, which sports a 5-star Morningstar rating and has gathered nearly $400 million in assets since its 2008 launch. It combines secular and religious screening; manager Finny Kuruvilla screens the portfolio according to five broad principles that encompass many traditional SRI screens (environmental stewardship, avoiding alcohol, tobacco, gambling, and pornography), but which also has a biblical basis that leads the fund to avoid abortion-related stocks, among other things. Kuruvilla also runs Eventide Healthcare & Life Sciences ETNHX, which uses the same screening criteria but focuses on health care.

Broad-Based SRI Funds From Other Shops
In addition to these shops devoted exclusively to socially responsible investing, several other families offer socially responsible funds as part of a broadly diversified fund lineup. These offerings vary quite a bit in their characteristics, but they're not necessarily as focused on SRI/ESG investing as the funds mentioned above, and not all of them do extra things featured in the SRI-only shops, such as community investment. They can be a good option if you'd like to keep your investments in a single fund family and want a socially conscious option; some of these funds also carry relatively low expense ratios, another big plus.

Some of these are index funds, which generally do use fairly strict social screens. Vanguard FTSE Social Index VFTSX tracks the FTSE4Good U.S. Select Index; its 0.28% expense ratio makes it one of the cheapest SRI funds around and helps earn it a Morningstar Analyst Rating of Bronze. Until December 2005, this fund tracked the Calvert Social Index, which is still available to investors through the more-expensive Calvert Social Index CSXAX. Northern Global Sustainability Index NSRIX tracks the MSCI World ESG Index. Bronze-rated TIAA-CREF Social Choice Equity TISCX is a sort of indexlike fund that aims to replicate the risk characteristics of the Russell 3000 index while also subject to the social screens maintained by the social-investment department at MSCI. There are also a handful of socially responsible exchange-traded funds that use MSCI indexes: iShares MSCI KLD 400 Social DSI, iShares MSCI USA ESG Select KLD, and Pax MSCI EAFE ESG Index ETF EAPS, the latter of which holds foreign stocks. The only other broad-based socially responsible ETF is AdvisorShares Global Echo ETF GIVE, which is actively managed and thus doesn't follow an index.

David Kathman, CFA, is a senior fund analyst with Morningstar.

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