8
Socially responsible mutual funds, which avoid (or
favor) certain investments for ethical reasons, allow
investors with strongly held principles to invest with a
clear conscience. Such funds have been around
for decades, but in recent years they’ve become more
diverse, catering to investors with a wide variety
of beliefs. There are secular funds that screen invest-
ments using various environmental, social, and gov-
ernance, or
ESG
, criteria; religious funds that invest in
accordance with the beliefs of various denomi-
nations; and specialty funds that focus on one area,
such as environmental sustainability.
So, if you buy socially responsible funds, are you
sacrificing returns? Some critics have said yes and
argued that you’re better off choosing the best
funds regardless of where they invest and then do-
nating the proceeds to charity. Some proponents
have said that these screens actually boost returns.
They cite companies like Worldcom that blew up
and would have failed some governance screens.
Socially Screened Funds: The Good and the Bad
The diversity of screens, strategies, and asset classes
makes it challenging to draw a lot of conclusions
from the data, but there are enough
SRI
funds to run
some tests.
This diverse bunch includes good funds and bad funds,
just as in any other group. Some prominent socially
screened funds, such as
Amana Growth
AMAGX
and
Parnassus Equity Income
PRBLX
, have
trounced their peer groups over the long run. Others,
like
Calvert International Equity
CWVGX
, have
badly underperformed over time, while many others
are somewhere in the middle.
Moreover, social screening can help or hurt short-
term fund performance in certain market environ-
ments, so it makes a difference what time period
you look at. For many years,
Domini Social Equity
DSEFX
tracked the
KLD
400
Social Index, which
excludes many energy and industrial stocks for envi-
ronmental reasons but is usually heavier in tech-
nology than is the broader market. The fund handily
outperformed the S
&
P
500
Index in the tech-led
bull market of the late
1990
s but trailed the index in
the subsequent bear market when tech was among
the worst-performing sectors.
It’s tricky to determine how much of these funds’ per-
formance is due to social screening, as opposed
to manager skill and other factors. Two prominent
SRI
funds—the above-mentioned Amana Growth and
Neuberger Berman Socially Responsive
NBSRX
—
have longtime managers who also run very similar
funds with no social screening:
Sextant Growth
SSGFX
and
Neuberger Berman Guardian
NGUAX
.
But in each of these cases the screened and
nonscreened funds have similarly strong long-term
results, with the screened fund’s
10
-year returns
being better in one instance (Amana Growth) and
slightly worse in the other (Neuberger Berman
Socially Responsive).
Crunching the Numbers
For a more thorough analysis, we took a systematic
look at the track records of all the U.S.-based mutual
funds identified as socially responsible in Morning-
star’s database. We considered two
10
-year time peri-
ods, one beginning on Dec.
31
,
1997
(and thus ending
right before the
2008
financial crisis), and one begin-
ning on Dec.
31
,
2002
(going almost up to the present).
In order to avoid survivorship bias, we looked at
all the funds that actually existed at the beginning of
each period, not just those that survived until the end
without getting merged away or liquidated.
The first thing we looked at was success rate, defined
as the percentage of funds that survive for a given
time period (in this case
10
years) and beat their peer
group over that time. Of the
86 SRI
funds existing at
year-end
1997
,
26
lasted through the end of
2007
and
beat their category peers during that time. That’s a
success ratio of
30%
, versus a success ratio of
28%
for all non-
SRI
funds over the same time frame. Of
the
170 SRI
funds existing at year-end
2002
,
42
lasted
Social Screens Don’t Help or
Hinder Returns
Morningstar Research
|
David Kathman
