Socially Responsible Investing, Part 1

I have been researching lots of socially responsible funds using a list I found at Social Investment Forum and Morningstar's free fund data. As much as I want to find one or more socially responsible funds that I would be happy to invest in and recommend to my friends, I'm coming up short.

Here are the funds I've looked at along with their ticker symbols, in case you'd like to look them up yourself. I started compiling the list from funds that had 9% or higher returns over a 10 year period. I aim for this return myself whenever choosing a fund since the S&P 500 historically returns this amount and my retirement calculations are therefore based on it. Then I expanded my list to funds that returned 7% - 9% since there were so few in the first category. I also added other funds that sounded like they might have potential. You'll notice a heavy emphasis on Bridgeway funds--this is because their expense ratios are much lower then other socially responsible funds, and because I considered investing in one of their funds several years ago. The Calvert funds say "confused" instead of a ticker symbol because there were so many share classes that I couldn't figure out which one the average investor would want to choose. Sure, I could rule out the ones with $1,000,000 minimums, but after that I was lost.

Fund Name Symbol Expense ratio Load Style 10 yr. Initial
Domini Social Equity Fund DSEFX 1.15 None Large blend n/a
Bridgeway Ultra Small Company Market BRSIX 0.67 None Micro growth 14.83 2000
Calvert Large Cap Growth Confused

New Alternatives NALFX 1.25 4.75 Front Mid growth 9.3 2500
Parnassus Equity Income PRBLX 0.99 None Large growth 10.6 2000
Winslow Green Growth Fund WGGFX 1.49 None Small growth n/a 5000
Vanguard FTSE Social Index VFTSX 0.25 None Large growth n/a 3000
Bridgeway Blue Chip 35 Index BRLIX 0.15 None Large blend 7.17 2000
Calvert Social Investment Equity Confused

Citizens Emerging Growth A WAEGX 1.88 None Mid growth 7.96 2500
Neuberger Berman Socially Reponsible Index NBSTX 1.13 None Large growth 7.43 1000
Pax World Balanced PAXWX 0.94 None Large growth 8.57 250
TIAA-CREF Instl Social Choice Eq Retail TICRX 0.4 None Large blend n/a 2500
Bridgeway Aggressive Investors 2 BRAIX 1.22 None Mid growth n/a 2000
Bridgeway Balanced BRBPX 0.94 None Large growth n/a 2000
Bridgeway Small Cap Growth N BRSGX 0.92 None Small growth n/a 2000
Bridgeway Large Cap Value BRLVX 0.79 None Large value n/a 2000

This chart does a pretty good job of illustrating the common problems with socially responsible funds.

1. High expenses. With a few exceptions, these funds have such high expense ratios that I wouldn't give them a second look normally. Some folks say that any expense ratio under 1% is good for domestic funds. I say, why spend 1% when you can spend .2% or .1%? The funds I own actually have expense ratios in the .4 to .6 range, but I'm okay with that because they've been outperforming their lower cost cousins. For now. When things change, I might pick up some different funds. They say that in the long run, funds with higher expenses tend to underperform. Supposedly, the higher expense ratios commonly seen in SRI funds are due to the extra research that must be performed to create them. I guess I shouldn't be bothered by that, but I am, since the higher fees don't come with higher returns.

2. Loads. As if high expenses weren't enough, some of these funds have the audacity to charge loads. Just say no. If you want to give your money away, donate to charity, not to fund managers.

3. Overemphasis on growth stocks. Personally, I prefer value stocks or a blend of large value and large growth stocks because I don't like my investments to be too volatile. This is largely a matter of individual risk tolerance, though.

4. Unexciting long-term returns. The only fund that has impressive long-term returns only got them because it had a ridiculous year in 2003. If not for that one year, whose performance will probably never be repeated, the fund would be lackluster. I want a fund that is a consistent high-performer.

5. Too new. I don't like to invest in funds that haven't been around for at least ten years. Again, this is a matter of individual risk tolerance. If you look at any stock fund, you'll see that it has some good years, some bad years, and some just okay years. It's all too easy to look at a new fund and think that it is good, bad, or just okay when it only has a couple years' worth of results to report. Drawing the wrong conclusion can mean bad things for your returns.

6. Not responsible enough. I can be moderate about some things, but on most subjects, my beliefs are quite liberal, if not radical. If I'm going to sacrifice returns, I need to be giving up more than just Halliburton and Wal-Mart. I need to be giving up all the companies I hate. The better performing SRI's still own stock in companies I find questionable (Microsoft), if not downright offensive (Wells Fargo).

Let's pretend for a moment that I have to choose from these funds. Which ones do I think are the best, or rather, the least bad options?

Parnassus Equity Income. I hate to choose this one because of #6, but I figure if I can still earn 10.6% while being slightly more responsible, that's pretty acceptable. Also, it hasn't been too volatile thanks in part to holding 15% of its assets as cash.

Pax World Balanced. I don't love this fund either, but it has a respectable 8.57% record over ten years and a sort of acceptable .94% expense ratio. It also hasn't been too volatile.

I might follow the advice of one socially responsible investing website and just put 1% to 5% of my assets in one of these funds. I might sacrifice a bit of return, but if more investors would just chip in a little bit to more responsible investing efforts, the effects could be quite positive.

Photo by hagengraf

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