You Can Do Well With Mutual Finds That Aim to Do Good

By Walid L. Petiri

NEW YORK (AdviceIQ) -- Socially responsible investing is increasingly popular, with more and more mutual funds offering this ideals-based style. It is a diverse field, more known for what the funds avoid (some won't invest in cigarette companies, others bar defense contractors, etc.) than what they embrace (pro-green or promoting diversity, for instance). But are they good investments?

Actually, the answer is yes.

Aiming to do well by doing good, SRI funds are not in the business of losing money in pursuit of noble ideals. Also called impact investing, this style has the advantage of offering karmic rewards to its investors, which is powerfully attractive and aids in garnering investments.

Maybe you don't think of yourself as an activist. You don't demonstrate with a sign, you don't have the time or energy to push political, human rights or other types of civic causes. Yet by putting your money into a financial organization that advocates for certain types of corporate behavior, you can be part of generating change.

The demand is there, and financial firms are seeing it. In 1995, according to the Forum for Sustainable and Responsible Investment, there were only 55 mutual funds engaging in SRI, holding $12 billion in assets. By 2010, that grew to 493, with $569 billion. By last year, the number ballooned to 720 funds, managing $1 trillion.

Attaining the goals you want through a fund can be tricky, though. On one hand, for example, it may seem appealing to allocate X% of your money to an emerging-market fund dedicated to impact investing. You could help the emerging economy of a nation or a region with a growing middle class and cast your vote in a certain economic direction. On the other hand, many emerging-market economies have lax environmental and labor regulations and poor track records when it comes to human rights -- and mutual fund companies are hardly lobbyists.

Beyond social returns, what about investment returns? A few years ago, impact investing had a bad reputation. The word on Wall Street was that your fund choices were limited and performance was nothing to write home about.

That's not true today. SRI funds appear to hold their own in the market. The KLD 400 Social Index -- pretty much regarded as the benchmark index for socially responsible investing -- is up 29.4% year-to-date in price terms, versus 25.6% for the Standard & Poor's 500. Over the past five years, the SRI index posted an annualized 15.7%; the S&P, 15.8%.

Not all SRI funds beat the S&P, yet many stick close, such as Calvert Equity, one of the oldest, which over five years delivered a 17.6% annual total return (including dividends), compared with 18.1% for the S&P. Some individual fund returns are very impressive. For example, Eventide Gilead, which the Social Funds investing site repeatedly ranks No. 1 in most categories, rose an annual 26.1% over five years.

Some stocks may not be to your liking in an SRI fund, particular a fund that turns over its portfolio frequently. Make sure that the funds are doing what they say they do. The Social Investment Forum says that just 27% of socially responsible mutual funds file shareholder resolutions or call actively for change at the companies they own. MarketWatch looked at 20 big socially responsible mutual funds and discovered that 10 invested in oil companies.

So you want to keep checking what you own, as sometimes a fund's interpretation of the screening criteria for inclusion in the fund can differ from yours. All in all, the numbers show clearly that you can do well by doing good, too.

-- By Walid L. Petiri, AAMS, RFC, chief strategist at Financial Management Strategies in Baltimore.

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

Follow AdviceIQ on Twitter at @adviceiq.

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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