SRI Fans Have Plenty of Good Core Options

The socially responsible investing (SRI) universe has expanded a lot over the past decade. While there were just 25 SRI funds 10 years ago--and 42 such offerings five years ago--there now are 60 SRI funds. These numbers only include funds that use a sizable and strict set of secular screens; offerings that rely on a limited number of secular screens, such as funds that only avoid tobacco stocks and alcohol stocks, are excluded, as are funds that employ religious screens.

But SRI investors still face a shortage of good supplemental choices. The SRI universe is still heavily skewed toward types of funds that are designed to be core holdings: 36 of the 60 strict secular-screened funds are domestic large-cap or allocation funds, in fact, whereas only 15 of these funds are mid-cap, small-cap, or overseas offerings. And though several of the large-cap-oriented funds are solid offerings--and a few are good ones--most of the smaller-cap and international offerings are unattractive for one reason or another.

The SRI Large-Cap Funds Are Solid Overall
The 12 large-growth SRI funds stack up fairly well relative to the competition. Though they've lagged the category norm a bit over the past three years, they've outgained the typical large-growth offering over the trailing five- and 10-year periods and suffered slightly less volatility over time.

The 15 large-blend SRI funds look fine in the aggregate. They have underperformed over the past three years, but that's primarily because their social screens keep them light on energy and other sectors that have been hot, and heavy on telecom and other sectors that have been cold. And they've beaten their category rivals by a small margin over the past five years and kept pace with them over the past 10 years, while suffering slightly less overall volatility.

The seven moderate-allocation SRI funds look decent collectively. They have lagged their category peers by small margins over the past several years and have been more volatile overall, but that's largely because their screens tilt them toward the growth end of the sector spectrum. And they've kept abreast with their category rivals over the past decade.

Three Good Core SRI Holdings
Three of the moderate-allocation, large-blend, and large-growth SRI funds stand out as core holdings. Manager Chris Brown has guided  Pax World Balanced (PAXWX) to a strong long-term risk/reward profile with a moderate growth strategy that readily considers mid-cap and overseas opportunities. Manager Arthur Moretti has earned impressive returns at  Neuberger Berman Socially Responsive (NBSRX) with a bold value-oriented style.  Vanguard FTSE Social Index  has a strong record to go along with its fetching 0.25% expense ratio.

Slim Value, Smaller-Cap, and Overseas Pickings
It's tough for SRI funds to use deep-value strategies because their environmental screens preclude them from owning a lot of names in the oil, metals, and other traditional value industries. Only two strict secular-screened funds fall in our value categories, and neither is a compelling option for diehard value aficionados at this point.

The five SRI mid-cap funds also aren't very appealing: The three mid-growth offerings have uninspiring longer-term records or unattractive expense ratios, while the two SRI mid-blend funds are young and have lagged so far. And all four SRI small-blend and small-growth funds have issues:  New Alternatives (NALFX) has disappointing long-term returns, for example, and though  Winslow Green Growth   has earned impressive gains over time, it is somewhat pricey and extremely volatile.

Moreover, the three SRI world funds don't stand out as supplemental picks or as core holdings. Their portfolios overlap significantly with those of many domestic large-cap funds, because they devote sizable portions of their assets to U.S. blue chips, and their long-term records range from middling to subpar.  Calvert World Values International Equity (CWVGX) is a foreign large-blend offering and thus doesn't have an overlap problem with domestic funds--and it did recently hire a promising new subadvisor--but its overall record and expense ratio are unattractive.

Conclusion
Dedicated SRI fans still need to be flexible about building their portfolios. While the number of fetching large-cap-oriented, strict-secular-screened funds means that they shouldn't have trouble finding a good core holding, the dearth of attractive smaller-cap and overseas SRI funds means that they have to be open-minded about getting their supplemental exposure. One option is to select a middling or somewhat pricey mid-cap, small-cap, or international SRI offering that is moving in the right direction and trust it will continue to improve. A second option is to choose a large-cap SRI fund that pays significant attention to mid-cap names, foreign opportunities, or both as a core holding, such as Pax World Balanced. And the final alternative, other than buying nonscreened funds, is to consider a complementary offering that uses a limited set of social screens.  Ariel (ARGFX) and  Ariel Appreciation (CAAPX), for example, are good mid-blend funds that screen out tobacco, handgun, and nuclear-energy firms but nothing else.

A version of this article appeared in the May 2006 issue ofMorningstar FundInvestor.