Ethical investing, a small corner in the money-managing world, is suddenly alive with activity. Since this time last year, three new ''ethical'' funds have sprung up, and one from Shearson/American Express is on the way. Three books covering the subject will be published in the next six months. And a number of newsletters have been started in the last year, too.
''There's a tremendous amount of interest on the part of the general public, . . . and a real growth in interest on the part of money managers and brokers,'' says Joan Bavaria, president of Franklin Research & Development, a Boston firm that specializes in ethical investing.
In the past few years, ethical investing has taken on a broader definition, and hence it may appeal to more people. It has moved beyond its criteria of don'ts - don't invest in liquor, tobacco, or gambling stocks - to a guideline of do's - do invest in companies that make a social contribution to the world.
While most of the ethical mutual funds still hold to their original taboos, either as a statement in the prospectus or as an internal, unwritten policy, they are now searching for companies that make a positive social impact. They want to invest in companies that have good environmental records; that have no equal-employment-opportunity violations; that promote participative management throughout the company, that make safe, quality products; or that do a good job with occupational-safety and health requirements. One new fund, the New Alternatives Fund in Great Neck, N.Y., invests only in solar and other alternative-energy technologies.
Amy Domini says the '60s generation may have something to do with the renewed interest in ethical investing. ''They are now earning and making pretty good money, and I don't think they're 100 percent comfortable with falling into the capitalist (mode),'' says this money manager at Moseley, Hallgarten, Estabrook & Weeden, in Cambridge, Mass. Ms. Domini is the author of ''Ethical Investing,'' which is scheduled to be published this spring.
Whatever the reasons, there are now more choices available to people who want to base their investments on ethical concerns. For the first time, there are two money market funds that specialize in this type of investing. One is run by the Calvert Group in Washington, the other is the Working Assets Money Fund in San Francisco.
The Working Assets fund is just a few weeks old and was started by Jerome Dodson, a Harvard Business School graduate and seven-year president of a savings-and-loan. Being a money fund, it makes short-term investments in top-rated commerical paper, discount notes, and government-backed securities.
But the investments are all toward ''positive economic activity or social needs,'' such as housing, higher education, and small business, Mr. Dodson says. And the companies issuing commercial paper have to live up to certain criteria. For instance, they can't be involved in weapons manufacturing, they can't use nuclear power, and they must bargain fairly with labor.
Though the fund literally has no record to speak of, Dodson says there is no profit trade-off between his fund and other money funds: ''Originally, some people thought social investing was very risky or had a rate of return below the market. But you don't have to give up that rate of return or safety. Our yield today was higher than the Donoghue average (an index that measures money fund performance). We're just as safe.''
Though no sophisticated studies comparing the performance of ethical funds with other funds have been published, Ms. Domini has ''a gut feeling that they do better.'' Other fund managers, such as Jeffrey Friedman, president of the Dreyfus Third Century Fund, says ''performance has been the fund's main selling point.''
H. Day Brigham says emphatically that he believes performance must be the main selling point of an ''ethical'' fund if it is to stay alive. Last month, the fund he used to manage, the Four Square Fund, was merged with the Eaton Vance Investors Fund, which does not have the ethical restrictions that guided Four Square. Mr. Brigham says the fund couldn't attract enough investors by marketing itself as a social fund: ''I don't think restrictions or goals per se help sales much. People only buy if they feel it will be a good investment.''
cho ''Performance is determined by the style and nature of investment management, not by social criteria,'' says Stephen Moody, vice-president of investments for US Trust Company in Boston. ''What you see with us is a portfolio . . . that should outperform all market averages over the long run.'' US Trust manages a new mutual fund and money market fund for the Calvert Group. Both funds have ethical guidelines.
Ms. Domini says ''the best mutual fund is one you can build yourself, . . . but I think it breaks down to the small investor and the large investor.'' The ethical mutual funds are good for individual retirement accounts and investments under $10,000, she says. Some money-management minimums and fees are such that $ 100,000 would have to be the starting point for your own portfolio.
Whether ethical investments are funneled into individual portfolios or funds, they are getting more professional management these days, those in the field say. Methods of ranking a company's social performance have been developed. Reference books on companies and their social impacts are being published. Funds are putting specialized researchers to work in the field. As Ms. Domini puts it, this kind of investing is becoming a ''discipline.''