Mutual Satisfaction

Got money on the brain as tax time looms? Save the planet and make a profit.

Since the 1970s many in the financial world have been laughing at socially responsible investment (SRI), proclaiming that having a conscience could not do your pocketbook good. For all their denouncements, the greedy Wall Street Geckos should contribute a month's dividends to charity: the last three years, and arguably the last five, have proven they have lost the bet against conscientiousness. Not only do socially screened mutual funds generate returns, but they have consistently beaten the Standard & Poor 500, outperforming the broader market— all the while demanding boards of directors assume responsibility for corporate behavior.

Since 1995, the number of dollars flowing into socially screened mutual funds has increased by 227 percent, bringing the total amount of money under management to almost $1 trillion. The flood of money into screened mutual funds has not resulted solely from pangs of guilt. The Domini 400 Social Index— the socially responsible investment world's answer to the S&P 500— tracks the performance of 400 companies screened for their environmental and social practices and has provided just one indication of the success of screened funds. Since it began in 1991, it has outperformed the S&P 500, and as of 1998 it was up 26.08 percent over a five-year period compared to the 24.04 percent of the S&P.

Moreover, 1998 was a great year for many screened mutual funds because these portfolios tend to be technology heavy. But you can't chalk last year's success up to that, says Sigward Moser, managing principal of Domini Social Investments. "SRIs have consistently produced for the last nine years, long before the high-flying days of tech stocks. That's because we are investing with companies more likely to avoid trouble, like a million-dollar employee lawsuit or a million-dollar environmental cleanup, which lowers the profit margin. We are picking companies with long-term vision and sound practices."

Jon Conrad

Socially responsible investing has a long history, dating back to 17th-century Quakers, who refused to profit from the two major industries of their time, slavery and war. In 1928, the mainstream Protestant churches that did not want their dollars invested in sin products— alcohol, gambling, and tobacco— started the Pioneer Fund. The early 1970s saw the rise of modern-day mutual funds that began to take environmental behavior, weapons manufacturing, and overseas actions into consideration.

Shareholder activism in the form of proxy resolutions— calling out a company on some type of behavior, e.g. investing in South Africa in the 1980s or advocating drilling for oil in Alaska's national parks in the 1990s— has become a tool for holding screened companies accountable. Once companies are approved for investment, it doesn't mean they're in the clear. Fund managers monitor their behavior and hope to keep corporate decisions "clean." Such resolutions are voted upon at board meetings, and although they rarely get passed by a majority of shareholders, they force discussion of the issue and require the company to include the resolution in its proxy statement.

"These are not far-out ideas— environmental protection, women and minority representation at the management levels," says Joe Keefe, executive vice president of Citizens Trust, a screened mutual fund. "I don't think people want to wear clothes made by eight-year-olds in Asia. Investments can have nonmonetary returns. When ordinary people align their investments with their beliefs, we start to see changes."

Today, practically all screened mutual funds avoid sin products, as well as nuclear power and defense products. But beyond those similarities, funds vary widely in their methods of selecting companies. Some funds are more rigorous in their screening of companies; some focus on one particular issue: although a fund is avoiding weapons producers or polluters, it may be investing in companies that use sweatshops.

To help you guide your pocketbook and your conscience, before you blow the pennies Uncle Sam deems fit to return to you, the Voice has compiled a guide to some of the most profitable screened mutual funds. (Many of these groups also offer IRAs.)

Domini Social Equity Fund

Probably one of the most well-known funds, it was ranked by Fortune, Money Magazine, Kiplinger's, and The Wall Street Journal as one of 1998's best overall mutual funds, while receiving a five-star rating from Morningstar [see sidebar for definitions].

The equity fund invests in all the 400 stocks that make up the Domini 400 Social Index, which does a two-pronged screen on companies. A negative screen avoids companies with revenues from tobacco, gambling, alcohol, nuclear power, and weapons contracting; and a positive screen ensures the inclusion of companies with good track records for hiring practices, community involvement, employee relations, and environmental policy.

Still, Domini has some of the least stringent requirements, allowing positive screens to offset the negative. Two hundred and fifty of the 400 stocks that make up the index also appear on the S&P 500. Furthermore, it is a bit reluctant to drop companies from the index. "We have a prejudice for companies that are already part of the index," founder Ann Domini said recently. If a company's adherence to Domini's criteria "deteriorates beyond a level we can justify, we will drop it off."

Domini's performance in 1998 yielded an average return rate of 32.99 percent, with the largest stocks in the portfolio being Coca-Cola, Microsoft, and Intel. Minimum investment is $1000.

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