Hasn't anyone screened these funds for cruelty to investors?
Some socially conscious investors got clobbered this spring, victims of a series of events that point up the obvious risks of the strategy.
The subject is of interest to more than just a few tree-huggers: 175 mutual funds with $154 billion in assets screen stocks for social responsibility criteria, according to year-end 1999 data from the
Social Investment Forum
For the past few years, the strategy has been as good for investors' wallets as it was for their karma. Returns have been more than respectable. The
Domini Social Equity fund, an index of 400 stocks that meet a set of social and environmental standards and avoid alcohol, tobacco and gambling stocks, outperformed the
index last year, returning 24.5% to the S&P's 21%. And the Domini has been ahead of the S&P by about 3 percentage points for the past three- and five-year periods as well.
Numbers like those helped push socially conscious investing into the mainstream. Just last month,
introduced a 467-stock index fund, the
Vanguard Calvert Social Index
, with an expense ratio of just 0.25%; Domini's is 0.95%.
It's easy to imagine that socially responsible investors might have been lulled into the perception that their values were safe on Wall Street. The world of finance wasn't so cruel after all.
Who would have guessed that ground-out tobacco stocks would start smokin' again? But that's just what they did, having finally tempted buyers with a combination of beaten-down valuations, rising profits and receding litigation fears. While the
lost 23% in the three months following its March 10 peak, tobacco stocks rose 39%.
Last year, as tobacco stocks suffered a 54% loss, simply not owning them was a big plus for the socially conscious set. This year, not owning them must have been as annoying to some fund managers as someone puffing away in the no-smoking section.
And it gets worse. Ever notice how smoking and drinking go together? Alcoholic beverage stocks rose more than 30% from mid-March to mid-June, buoyed by
, which agreed this week to be acquired by French water utility
. This was a run-up socially conscious funds obviously weren't toasting.
Of course, no socially conscious investors worth their sea salt would fault a fund for not participating in the drinking and smoking party that went on in the market this past spring.
But that wasn't all the funds had to worry about. Socially conscious funds, it seems, had a vice of their own: a certain gluttony for technology stocks. And why not? Tech companies don't pollute, are worker-friendly, don't test on animals and are becoming increasingly philanthropic and civic-minded.
The new Vanguard Calvert index has a 42% weighting in tech, as does the Domini Social Equity index fund. Among the top holdings for both:
Other socially conscious funds are even more tech-heavy. The
Noah fund has 71% of its assets in tech, including stakes in Cisco, Intel, Microsoft and
Parnassus fund isn't far behind, with 70% in tech stocks, including stakes in Intel and
Sheldon Jacobs, editor of
The No-Load Fund Investor
, has done some pencil work to figure out just how significant holdings in tech and health are for socially conscious funds. He calculates that two-thirds of the performance variation between the top-performing socially conscious funds and the laggards in the category is explained by tech and health weightings. For the past year, of course, overweighting tech was a winning strategy. But not so much recently, as the table below shows.
Tech stocks have been on the rebound the past two weeks, of course to the benefit of the socially conscious crowd.
And yet, I can't help asking myself: If two-thirds of the variation in performance of socially conscious funds is due to tech and health stocks, why shouldn't I be placing my bets with tech and health funds?
If I do OK, maybe I'll have plenty to contribute to my favorite cause.
Anne Kates Smith is a senior editor at U.S. News & World Report in Washington. At time of publication, Smith had no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.