Investors eyeing socially conscious funds are no longer looking merely at the social issues; they are also looking for performance — a change that has resulted in new offerings from fund firms in asset classes that have been underrepresented in this market for nearly a decade.
With several launches in the past year, the socially conscious investing market, which has focused mainly on large-blend or large-growth investments, is starting to expand into small-cap and international investments.
That said, the market still represents only a small portion of the mutual fund industry, with total assets of $40 billion as of Oct. 31, according to Financial Research Corp. of Boston.
The Calvert Group Ltd. of Bethesda, Md., launched the Calvert International Opportunities Fund (CIOAX) and Calvert Global Alternative Energy Fund (CGAEX) this year in response to investor demand, said Paul Hilton, director of advanced-equities research at Calvert. In the past two years, the firm introduced several asset allocation funds.
Investors are looking for diversity. Pointing to the area of alternative energy, for example, he said: "For some of these companies that are leading the way and providing solutions, these can be the best places to invest." Mr. Hilton added: "You can invest with your values and for value."
The demand for diverse options has increased in the past two years.
Domini Social Investments LLC of New York launched its first international fund in 2005 and, in response to investor demand, followed that in 2006 with two more funds, said Adam Deixel, Domini's director of marketing and communications. Prior to that, the only Domini offerings were in domestic equity, domestic fixed income and a money market fund.
"Socially responsible investors are the same as other investors," Mr. Deixel said. "They care about diversification and having a broad access to investment opportunities."
Investors are also looking to broaden their impact. "If you look at Europe, for example, there are lots of companies that, on some issues that our shareholders care about, are out ahead of America, such as climate change," Mr. Deixel said.
Boston-based Winslow Management Co. LLC recently opened a global fund.
Looking at strictly secular funds with more than one screen, Chicago-based research firm Morningstar Inc. reports that 18 new socially conscious funds were launched in the past three years, bringing the total of such secular funds to 68.
These funds previously had few offerings in the small-cap and international categories, said Bill Rocco, senior analyst at Morningstar.
Because the growth into new asset classes is just beginning, challenges persist in building a portfolio comprising solely socially conscious funds, although it can be done. While there are good funds out there, there aren't a lot of them, Mr. Rocco said.
"The biggest problem with [socially conscious funds] is that they are still limited to core domestic options," he said. "There are not a lot of good funds out there with value or small-cap or international funds. The traditional value sectors like energy and materials have problems with the environmental screens," Mr. Rocco said.
About half of the 68 socially conscious funds that Mr. Rocco studies are large-blend, large-growth or moderate-allocation funds that favor large-blend, large-growth and some bond funds, he said.
DISTORTION
"The [socially conscious] screen distorts sector weightings, so it's hard to compare them," Mr. Rocco said. "A software company can pass the screen. Metals or heavy manufacturing industry may fail the environmental screen. [A socially conscious] large-blend can be skewed away from certain sectors."
Some of the new funds haven't had a chance to garner significant assets and may be more expensive. Others don't have a lengthy history to evaluate.
Socially conscious funds are also becoming more popular in retirement plans. New York-based De-loitte & Touche USA LLP found that the incidence of such funds in defined-contribution retirement plans had increased to 8% by last year, from 3% in 2002.
Last year marked the launch of Social (k), a Springfield, Mass.-based platform that not only offers more than 150 screened socially responsible funds to choose from, but also more than 2,000 traditional funds to provide investors with more choice when determining a retirement portfolio mix.
Investing is also about returns.
"For a long while, the [socially conscious] funds didn't have stellar performance," said Philadelphia-based mutual fund consultant Burton Greenwald. "When some of the funds broke out, that changed things."
STANDOUT PERFORMANCES
The standout performance of some funds caught investors' attention, he said, citing the Pax World Balanced Fund (PAXWX), the oldest socially conscious offering. Based in Portsmouth, N.H., the fund performed in the top 5% of moderate-allocation funds in 2004 and has outpaced its peers in the past three-, five- and 10-year periods. The fund has current assets of $2.5 billion.
The rate of growth for socially conscious funds, including both secular and religious funds, has been on par or a little less than the entire industry, FRC reported, with a five-year compound annual growth rate of 15.94%, compared with 17.95% industrywide, and a three-year rate of 8.65%, compared with 14.64% for the industry.
The growth rate may reflect market volatility, FRC research analyst Bridget Bearden said.
Only one of the funds in the top five in 2000 is in the top five today, FRC said.
Sue Asci can be reached at [email protected].
