Socially conscious funds move beyond screen test

More proactive stock picking leading to more robust results

Mar 31, 2013 @ 12:01 am

By Jason Kephart

Socially conscious funds are getting proactive. For most of their 20-plus-year history, such funds have been focused more on what stocks to avoid than those to own, but that's changing.

“[Socially responsible investing] became understood as screening out certain things you disagree with,” said Joe Keefe, president and chief executive of socially responsible asset management firm Pax World Management LLC. “That was greeted skeptically.”

The skeptics were quick to point out that filtering stocks could mean giving up performance. If there was a rally in oil stocks, for example, socially conscious funds would be left in the dust because most screen out those companies.

Over time, though, the idea that socially conscious funds will underperform their peers hasn't been proven, said David Kathman, an analyst at Morningstar Inc. who covers socially conscious funds.

“I get the performance question all the time,” he said. “As a broad group — and it's a very broad group — they don't perform any differently than other funds. There really hasn't been good evidence that social screens make a significant difference in practical terms.”

Take the $84 million DFA CSTG&E U.S. Social Core Equity 2 Fund (DFCUX) from Dimensional Fund Advisors, for instance. It has annualized returns of 6% over the five-year period ended March 25. The $5.9 billion DFA U.S. Core Equity Fund (DFEOX), which is not socially screened, has a 6.49% annualized return over the same period.

By becoming increasingly proactive — looking for companies that fit the ideal profile of a socially conscious investment — there's a belief the strategy could lead to better performance than non-socially screened peers.

“The theory is that [environmental, social and governmental factors] is material and has relevance financially,” Mr. Keefe said. Socially conscious funds now look at factors such as how companies manage and prevent pollution, how they promote workforce equality and how accountable their board is.

None of those factors shows up in quarterly financial reports, so managers of socially conscious funds have had to rely on companies' willingly disclosing that information.

“What's supported this evolution is the evolution of data available to investors,” said Amy O'Brien, head of TIAA-CREF's global social and community investing department.

Companies are disclosing more information than ever, she said. That's allowed fund managers to home in on what's most important to them, and given shareholders an extra reason to be happy.

“Investors want to support something they view as positive,” Ms. O'Brien said.

The result of focusing on positive attributes has paid off for TIAA-CREF. The $1.4 billion TIAA-CREF Social Choice Equity Fund (TICRX) ranked in the top quintile of large-cap mutual funds over the five-year period ended March 25, thanks to annualized returns of 5.7%.

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