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."

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 Voicehas 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.

Domini is extremely committed to shareholder activism. This year it is filing nine proxy resolutions, hoping to draw attention to the sweatshop practices of overseas contracted factories used by Disney and Sears.

Citizens Emerging Growth Fund

Heavily invested in "dynamic industries of the future"— technology and communications— the Emerging Growth Fund has outperformed similar nonscreened funds in the same category by 98 percent since its inception in February 1994. It is just one of five Citizens funds that have been kicking socially conscious ass.

Citizens has a tough screen for companies it invests with— reviewing issues like environmental policy and employment diversity within each company's industry, rather than within the overall market. This, it believes, ensures selection of the very best companies in each industry.

The criteria ensure it avoids companies with operations in Burma, those that appear on the AFL-CIO boycott list, and those that use sweatshop labor and animal testing. The downside is that Citizens requires $2500 to enter the fund, one of the largest initial investments among socially screened mutual funds.

"We believe that our rigorous social and environmental screening lets us know more about companies. We are able to identify the best companies, which in the long run produce better," says Keefe.

In 1998, the fund had a whopping 42.71 percent rate of return, and since 1994 it has produced at a rate of 24.18 percent. Top holdings consist of America Online, Tandy, and Maytag; it is a mid-cap, actively managed fund.

In 1997, Citizens put J.C. Penney in the hot seat by filing a shareholder resolution demanding a review of overseas contracts that may have been using sweatshop labor. J.C. Penney agreed to the review.

Pax World Fund

One of the greatest advantages of this, the original socially screened mutual fund, is the mere $250 needed for the initial investment. Luther Tyson founded it during the Vietnam War, wanting to provide a mutual fund that did not invest in war-related industries. Pax, which means peace in Latin, excludes companies that manufacture weapons-related products, or those that derive more than 5 percent of revenues from Defense Department contracts. In addition, Pax seeks out companies that are "producing goods and providing services that improve the quality of life."

Pax World Fund is a no-load, balanced, large-cap fund that received a Morningstar four-star rating in 1998. Yearly returns averaged 24.62 percent for one year, 19.83 percent for three years, and 17.94 percent for five years. Pax also offers money market funds and two equity funds.

Pax enables shareholders to donate dividends to Pax World Service/Mercy Corps, a nonprofit that focuses on community development in the Third World. One of the most recent projects of the nonprofit was supporting relief efforts for displaced persons in the war-torn region of Kosovo.

Shareholder activism at Pax, according to spokesperson Anita Green, "is along the lines of dialogue as opposed to sponsoring resolutions. We do not invest in companies with the purpose of becoming active, because we find our portfolios to be rather clean."

Calvert Capital Accumulation

"Our screening is extremely thorough," says spokesperson Elizabeth Laurienzo on what makes Calvert unique. A team of seven analysts with specialities in areas such as labor relations, human rights, and the environment actively reviews companies' practices, and expresses encouragement or concerns to companies regarding these issues.

The Calvert Group, which requires an initial investment of $2000, has a family of more than 26 mutual funds and currently manages $6 billion in assets. It seeks companies with allegiance to international human rights law, environmental and workplace standards that exceed government standards, and community investment. It does not invest in companies with 10 percent or more in annual sales from weapons contracts. A number of Calvert's funds have produced well over the last five years, gaining at least three-star ratings from Morningstar.

The Capital Accumulation fund has been the best performer of the batch. A mid-cap equity fund, it delivered twice as well as funds in that category, with a 1998 annual return of 29.35 percent. Since the fund's inception in October 1994, the average rate of return for mid-cap equity has been 22.09 percent, while Capital Accumulation has come in at an average of 23.52 percent. Largest holdings as of December 1998 were Sterling Commerce, Network Associates, Harley-Davidson, Alza Corp, and Catalina Marketing Corp.

Calvert participates in shareholder resolutions, most recently pressuring Home Depot to make public its hiring demographics and calling for more diversity in the company's workforce.

Green Century Equity Fund

Green Century, which is owned by nonprofit environmental advocacy groups, had a solid year for its equity fund in 1998, producing an annual average return of 32.32 percent. The equity fund, which uses the Domini portfolio, is the least green of the funds offered by Green Century— with top holdings in Microsoft, Coca-Cola, Intel, Wal-Mart, and Merck— but by far the most profitable. The company's balanced fund, with more rigorous environmental standards, had a rough year in 1998, with losses of 10 percent.

Green Century has a minimum investment of $2000 but offers an "automatic investment plan" that allows payment as small as $50 to be transferred from your bank account to a Green Century account on a monthly basis.

Green Century attempts to keep companies it holds on the green path through stockholder resolutions and consistent dialogue with corporate heads. The pressure this year is on Atlantic Richfield Company (ARCO), one of four oil companies pushing Congress to open the Arctic National Wildlife Refuge to drilling. Green Century has filed a shareholder resolution to cancel any plans for drilling that will be voted on at the next shareholder meeting in May. In the past, shareholder resolutions filed by Green Century have brought about changes in the environmental policies of Intel, PepsiCo, and Time Warner.

Dreyfus Third Century Fund

Founded in 1972 by Howard Stein, Third Century was the second screened fund and the first from a major financial player. Few traditional firms have followed in Dreyfus's footsteps, but Third Century has, through the years, shown a consistent rate of return— last year's return was 30.17 percent, the three-year rate stands at 36.45 percent, and the five-year is 32.63 percent.

The fund concerns itself primarily with environmental and consumer protection, occupational health and safety, and equal-employment opportunities. A large-cap, actively managed equity fund, Third Century holds Sun Microsystems, Fannie Mae, Clorox, Compac, and Merck, among others. Requiring an initial investment of $2500, Third Century handles more than $1 billion in assets.

Although Third Century does not file shareholder resolutions with the companies in its portfolio, it has actively supported the resolutions filed by other shareholders. "We try to dialogue with companies about social and environmental practices," says Paul Hilton, portfolio manager at Third Century. "Dreyfus handles more than $110 billion and we feel that is an advantage when Third Century calls on companies to review their practices."


Huh?

No-load No sales charge (load) added by the mutual fund company when you buy or sell the fund.

Equity fund Invests primarily in stocks.

Index fundInvests in stocks that make up an index. For example, the Domini Index fund invests in the 400 stocks that make up the Domini 400 Social Index.

Actively managed Fund that is handled by a manager who makes investment decisions, as

opposed to a passively managed

fund like an index fund.

Balanced fund Has investment policy of balancing a fund's portfolio with fixed-income securities like bonds. Usually considered lower-risk.

Growth fundInvests in the stocks of well-established firms that are expected to grow for years to come.

Large-capInvests in the largest companies, including blue chips, with higher revenues and market capitalization (value of corporation determined by market price), usually more than $11 billion (e.g.

Microsoft, Johnson & Johnson).

Mid-cap Invests in midsize companies with a market capitalization between $1.3 and $11 billion (e.g. Apple, McGraw Hill).

Morningstar rating The most used rating system for mutual funds. Morningstar is an

independent company that ranks

funds based on risk and return. A five-star rating means that the

fund is in the top 10 percent of its category. A one-star rating is the bottom 5 percent.

www.coopamerica.org Co-op America has been working since 1982 to harness money for environmental and social change. Includes links to pages dealing with sweatshop labor, environmental concerns, and companies currently being boycotted.

www.socialinvest.org The Social Investment Forum home page, a national organization dedicated to SRI, works with investors, educators, researchers, and foundations.

www.greenmoney.com A newsletter that focuses on promoting socially responsible business practices, investments, and consumer resources.

www.morningstar.com Home page of Morningstar, offering financial information.

www.mfmag.com Mutual Funds Magazine home page.
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