Social Funds' Ethics Lead to Outperformance

A decade ago, only a few social funds existed. Typical offerings aimed to avoid companies that produced tobacco, alcohol and weapons. Some funds sought to shun businesses that polluted or violated labor rules. Lately more specialized funds have appeared, including portfolios for Catholics and supporters of alternative energy. Now Morningstar tracks 118 socially responsible funds.

While the funds follow different strategies, some trends have appeared. In general, the funds emphasize growth stocks, including technology and health shares. This is because those companies tend not to pollute. At the same time, many funds are underweight energy and industrial companies, which may violate environmental rules. Because of the weightings, social funds excel in some years and lag in others. Social funds beat their benchmarks in the late 1990s, a time when technology stocks led the markets. When value stocks climbed in 2006, social funds trailed. This year, social funds have enjoyed an advantage because they underweight energy and industrial stocks, which have sunk in recent months.

Seeing the recent performance, some investors may conclude that social funds will continue being long-run winners. That is impossible to predict. But you should feel free to buy a sound fund that supports your favorite cause.

Investors seeking a tame choice might consider Pax World Balanced(PAXWX), which holds a mix of high-grade bonds and blue-chip stocks. During the past five years, the fund has returned 5.3% annually, compared to 5.1% for the S&P 500. Started in 1971, the fund has long avoided alcohol and tobacco. More recently, Pax has begun emphasizing companies with strong records for dealing with employees and the environment. Stocks in the portfolio include solid blue chips with growing earnings, such as Deere and Procter & Gamble.