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Our Picks

Socially Conscious Funds That Do More

These do-gooder offerings deserve recognition beyond socially responsible preferences.

In the wake of events like the Gulf oil spill, some investors have become increasingly proactive about making sure their investment philosophies align with their environmental and social values. Stock investors can craft portfolios that align with their beliefs, while fund investors can invest in managed socially conscious investments. According to US SIF: The Forum for Sustainable and Responsible Investment, the socially responsible investing market (which includes both individual and institutional clients) now holds about $3.07 trillion in total assets under management.

These investments are far from one-size-fits-all, however. They use a number of socially responsible investing strategies, including screening, shareholder advocacy, and community investing. Moreover, funds vary widely in the types of values-based screens they apply. Some funds will use broad-based secular screens--eliminating all businesses involved in alcohol, gambling, weapons manufacturers, military, and tobacco companies, for example--while other socially responsible funds will screen out just one or two of the aforementioned company types. Other funds look for companies that align with religious tenets; the Amana funds, for example, are managed in accordance with Islamic principles. So note that you will need to do your homework on individual funds to make sure that a fund's screening approach aligns with your values.

To home in on some topnotch domestic funds with socially conscious mandates, we turned to the  Premium Fund Screener. We began by screening for funds that have been tagged as socially responsible by Morningstar based on the information we find in each fund's prospectus. To help home in on funds with good fundamentals, we added a screen for Morningstar Ratings for funds of at least 3 and screened for managers who have helmed the fund for at least five years. On the fees front, we sought no-load funds sporting expenses below the category average. Finally, we called up offerings with Analyst Reports available. When we eliminated institutional funds as well as multiple share classes of the same funds, the screener yielded six funds, three of which we've highlighted below. To replicate this screen, Premium members can  click here.

 Amana Trust Growth (AMAGX)
This fund adheres to Islamic investing principles, which prohibits it from owning companies that derive more than 5% of their revenue from products or activities prohibited under Muslim law, including alcohol, tobacco, gambling, pornography, and pork. But managers Nick Kaiser and Monem Salam have managed to generate topnotch results even while working within those strictures as a result of their well-honed focus on companies with competitive advantages. Moreover, some of the fund's religious screens have helped boost performance. For example, the fund cannot own companies with debt greater than 30% of their market cap, and that stricture helped management avoid highly leveraged companies, including financials stocks, that fell the furthest during the recent recession. Although the fund's long-term record is strong, keep in mind that the fund is not immune to short-term volatility--especially when more speculative fare is in vogue. But investors who understand the fund's mandate and are willing to ride out these temporary bumps will find this fund a compelling core option.

 Neuberger Berman Socially Responsive (NRAAX)
Using secular rather than religious screens, lead manager Arthur Moretti and his team of three comanagers filter out firms that derive a significant portion of their revenue from alcohol, tobacco, nuclear power, or gambling. Management also favors firms with a focus on the community, workplace, and the environment. But analyst David Kathman notes that, in an effort to remain diversified across sectors, they'll also pick up what they think are the "least offensive" firms in sectors such as energy and materials, which other socially responsible funds often avoid. Within this pool, the managers seek undervalued companies that are experiencing temporary setbacks but are well-poised for a turnaround. The sector weightings of this concentrated portfolio of 37 holdings often deviates from the S&P 500 and its large-blend peers, but the fund has consistently outpaced its category during the past decade. In fact, its 10-year returns lands in its category's top decile, making this fund one of the best-performing socially responsible mutual funds. Investors with similar social and environmental convictions have a lot to like here.

 Parnassus Equity Income (PRBLX)
Veteran manager Todd Ahlsten employs environmental, social, and governance screens to avoid heavy polluters and manufacturers of alcohol, tobacco, and weapons. He takes a valuation-sensitive approach with an emphasis on dividends, resulting in a portfolio that consists of about 75% dividend-paying stocks and the other 25% in growth-oriented names. He also takes an all-cap approach and will dip into the energy sector (which distinguishes it from many of its socially responsible investing peers). Ahlsten's penchant for sector bets courts additional risk, and the fund finished in its category's basement in 2010, owing to some missed calls within the technology sector. But Morningstar analyst Rob Wherry urges investors to put this short-term struggle in the context of the fund's strong longer-term track record. Moreover, it's worth mentioning that Ahlsten is also heavily invested in the fund. For socially conscious investors seeking a topnotch fund that adheres to a time-tested strategy, this offering is worthy of consideration.


Esther Pak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.