Doing well by doing good
Socially responsible investing reaps rewards in an uncharitable market
By Sam Mamudi, MarketWatch
Last Update: 12:03 PM ET Nov 2, 2008
NEW YORK (MarketWatch) -- The market's meltdown has left every category of stock mutual funds in the red this year, but one area that has held up better than most is socially responsible investing.
As of Oct. 30, a total of 15 out of 91 faith-based and secular socially responsible funds that invest in stocks had outperformed the Dow Jones Industrial Average, some by more than 10 percentage points, according to investment researcher Morningstar Inc.
These results are encouraging for socially responsible investors because the odds are stacked against them. By screening stocks according to various ethical and moral standards, socially responsible funds by definition shrink their universe of investing options. In theory that makes it harder to provide market-beating returns.
But this year the reverse is also true: some socially responsible screens have helped their managers outperform the market and mute investors' losses.
Screen plays
"There are definitely some socially responsible screens that have helped in this environment," said David Kathman, analyst at Morningstar. "This type of market, which is punishing risk, is good for a lot of socially responsible funds."
Among the best performers is Parnassus Workplace Fund (PARWX) , which lost 25.3% through Oct. 30 versus a 29.3% decline for the Dow ($INDU) .
The fund was sprung from Fortune magazine's "100 Best Companies to Work For," said manager Jerome Dodson. While the portfolio now also invests in companies not on the Fortune list -- and also avoids some that are -- the principle of companies which treat their employees well is still the driving force.
"As time goes on, I've become convinced that investing in a company that's a good place to work will do very well for you over time," Dodson said. "There's a connection. When you get this kind of socially good management, you get overall good management."
The fund's screening process includes gauging corporate governance and good accounting practices -- factors that also reflect better managed companies, Dodson said.
Among his non-Fortune picks are Baldor Electric Co. (BEZ) , a Fort Smith, Ark., based maker of motors and generators. The company has a literacy program for its employees, and 15% of its pretax profits go to its workers. The company's stock held up for most of the year, before falling hard in October.
Wells Fargo (WFC) is another company with a good management record that Dodson recommends.
Ahead of the crisis
TIAA-CREF is explicit about how its social screens have helped returns for its Social Choice Equity Fund (TICRX) , which is down about 33% so far this year. The fund's most recent fact sheet, from Jun. 30, lists poorly performing companies that were blocked by its screen. The list includes General Electric Co. (GE) , JPMorgan Chase & Co. (JPM) , American International Group Inc. (AIG) and Citigroup Inc. (C) .
Amy O'Brien, part of the social and community investing department at TIAA-CREF, said that Social Choice Equity screens financial services companies based on factors that include corporate governance, predatory lending practices, transparency and executive pay.
"The themes that underpin the current crisis are themes that the socially responsible investing community and corporate governance people have been talking about for a number of years," O'Brien said.
Matt Zuck, part of a five-person management team of AHA Socially Responsible Equity Fund (AHSRX) , said that while screens can sift out some bad stocks, the discipline of tighter screening requires a manager to dig deeper. "In so far as it forces you to ask more questions about a company, it's valuable as an analytical tool," he said.
Fundamentals rule
One factor that can't be overlooked is fundamental stock selection. A case in point is Amana Trust Income (AMANX) and sibling Amana Trust Growth (AMAGX) -- two mutual funds that are managed according to Islamic principles. Among those principles is a prohibition on usury -- any activity that is interest-bearing. As such, the Amana funds always avoid the financial sector.
Monem Salam, deputy portfolio manager at Saturna Capital, which manages the Amana funds, said that among the holdings are companies such as Pfizer Inc. (PFE) and Exxon Mobil Corp. (XOM) , that pay steady and reliable dividends. (Exxon is a company that many socially responsible funds will not invest in because of screens that block oil companies.)
Amana Trust Income was down 22.8% this year through Oct. 30, with annualized three- and five-year returns of 3.5% and 10%, respectively. Amana Trust Growth, meanwhile, was down 27.6% so far this year; the fund's three-year annualized return was 0.3% and its five-year average yearly gain was 7.7%.
Parnassus' Dodson noted that he avoided some of the companies on the Fortune list, such as financials, including Goldman Sachs (GS) , and homebuilders because he thought they were overvalued. "We're paying attention to valuations and macroeconomic factors, too," he said.
The AHA fund had dropped financials for purely fundamental reasons, Zuck added. "In 2007, we owned Citigroup and AIG, but left them because we saw the emerging problems in the financial sector," he said.
Whichever mix of screens and stock-picking is used, socially responsible funds have shown that in tough times they're not a soft touch.
"It used to be thought that you had to give up returns to get those [ethical] screens," said TIAA-CREF's O'Brien. "But we see returns that are on a par with well-performing mainstream funds."
Top socially responsible stock funds
Fund Ticker YTD Return
Appleseed (APPLX) - 17.7%
Ave Maria Rising Dividend (AVEDX) - 20.2
Parnassus Equity Income (PRBLX) - 20.7
Parnassus Small-Cap (PARSX) - 21.7
Amana Trust Income (AMANX) - 22.8
Dow Jones Industrial Average ($INDU) - 29.3
Data: Morningstar Inc. (As of 10/30/08)
