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Investing in Socially Responsible Funds

We examine four good options for socially conscious investors.

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Investing in socially responsible mutual funds is an unusual challenge. The twin goals of doing well (in terms of total returns) and doing good (in terms of an intended social impact) are largely unrelated. It's up to individual investors to decide how they want to balance the two goals. Screening criteria differ from fund to fund, so you have to do a little legwork to figure out if they are in sync with your goals. Let's look at four of the best socially responsible funds from the standpoint of their prospects for returns. To make sure the fund's social goals are in line with yours, go to its Web site and review the screening criteria.

 Amana Trust Growth (AMAGX)
Social screening: The fund is run according to Islamic principles, and it excludes companies that receive 5% or more of their revenue from products excluded under Muslim law such as alcohol, tobacco, pork, gambling, and borrowing or lending money.

Manager and strategy: Nicholas Kaiser looks for companies with strong earnings growth and low valuations. A strong run of performance, boosted by the ban on bank stocks, has led to growth in assets and, in turn, a drop in expenses to a more reasonable 1.29%. The fund's long-term returns over 15 years are well ahead of its category peers. While avoiding banks helped recently, that long-term success clearly owes more to Kaiser's stock selection.

 Pax World Balanced (PAXWX)
Social screening: Pax World evaluates companies based on criteria related to the environment, workplace conditions, corporate governance, product integrity, and community development. They are shareholder activists who take steps to advance those priorities. On the downside, the firm got in trouble for failing to enforce its screens at two funds other than this one. New management came in and significantly ramped up compliance efforts.

Manager and strategy: Chris Brown tends to have more in stocks than most moderate-allocation managers. He's also biased toward mid-caps and foreign stocks and leans on shorter-term debt on the bond side. Overall, he's produced strong results, yet 2008 was a disappointment because of a big energy bet as well as a hefty equity stake and a big slug of foreign stocks.

 Domini Social Equity (DSEFX)
Social screening: Domini has rigorous screens that exclude alcohol, tobacco, firearms, gambling, nuclear power, and weapons contracting. The firm favors companies with strong records on environmental issues, workplace diversity, and employee relations.

Manager and strategy: Wellington took over in late 2006. Unfortunately, returns remained pedestrian under manager Mammen Chally, but two years is a short time to measure and I'm optimistic that Wellington's skill will win the day.

 Vanguard FTSE Social Index (VFTSX)
Social screening: This fund has tracked the FTSE4Good U.S. Select Index since 2005. The index applies environmental, diversity, workplace, and human rights social screens, and it excludes alcohol and tobacco.

Strategy: It's a straightforward index fund, but returns were hurt in part by a big weighting in financials. However, past returns don't mean that much for index funds. Index funds are mostly about costs, and this one has very low costs.

This article originally appeared inMorningstar FundInvestor.


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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.