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Socially responsible investing: Can fund screens be trusted?

Knowing whether funds live up to their promises to weed out certain companies remains a tall order.

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Somebody needs to be keeping a closer eye on those who aspire to hold companies to high ethical standards.

That's one of the key lessons observers are gleaning in the aftermath of a humbling episode for Pax World Funds of Portsmouth, N.H. The firm agreed this summer to pay a $500,000 penalty for having invested, over a four-year period, in companies that were off-limits because of their social and/or environmental practices. The case marked the first time the Securities & Exchange Commission had fined a socially responsible mutual fund for neglecting its own screening criteria.

Having caught one socially responsible (SR) mutual fund company in the act of failing to keep its promises, regulators at the Securities & Exchange Commission appear ready to find more.

"When we identify a risk area," says David Bergers, director of the Boston regional office of the SEC, "you can expect that we will be incorporating it into our examination oversight of funds."

But is government oversight enough to give investors peace of mind?

Investors have a lot riding on whether SR funds do as they pledge to do. If a fund takes more risk than advertised, for instance, a conservative investor could be surprised in a market downturn, such as mid-September's, to find a bludgeoned portfolio. And if a fund neglects to follow its social or environmental guidelines, then investors aren't getting the service for which they've paid higher-than-average expense ratios.


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