`Feel good' investing.
LIKE people who don't litter, won't buy products from companies that break the law, and who give money to worthy causes, socially responsible mutual funds try to put their money where their mouths are. Though poo-pooed at first by many investment experts, these funds have proven themselves successful financial tools. Over a short period of time, assets of ethical funds (there are about 12, depending on how you define ``socially responsible'') have grown steadily, and in some cases, they have performed better than the average mutual fund.
``One of the nice things about the mutual fund industry is that whatever you are or whatever you've got, there's something for you,'' says Reg Green, editor of the Mutual Fund News Service in San Rafael, Calif.
Although only a tiny part of the $800 billion mutual fund industry is held in these ``responsible'' funds, Mr. Green says, ``you get a reasonable investment, plus the feeling of being in something that is satisfying for you.''
Socially responsible mutual funds generally won't invest in South African companies, or firms doing business with other repressive regimes. They avoid military equipment producers, nuclear power producers, and promoters of alcohol, tobacco, or gambling.
Some of the funds look for positive criteria as well, like good management and labor relations, affirmative-action records, and safe products and services.
But the bottom line for all of them is a company's financial strength.
``We can have a great company socially, but if it doesn't meet our financial criteria, we don't even consider it,'' says Jon Lickerman, research analyst at the Working Assets Money Fund, the largest socially responsible money-market fund.
The San Francisco fund is also considered one of the most rigorous in screening out companies.
``My job is closer to being an investigative reporter,'' Mr. Lickerman says. As a result of its tough standards, the fund's $130 million assets are currently limited to between 25 and 30 companies. But it hasn't suffered greatly.
For the year ending this June, Working Assets had a total investment return of 6.16 percent. That compares with a 6.48 percent return for the average money market fund, according to Lipper Analytical Services, Inc.
Social screening can also be a protection, as in the case of gold stocks. Other funds, like the Oppenheimer MUTUAL Gold Fund in New York, one of the best-performing gold funds, have decided for nonethical reasons not to invest in South African gold.
``The social criteria through which we screen our stocks does give us further information on the future long-term performance of our stock,'' says Cindy Chin, vice-president of the Calvert group. ``The more you know about a company, the better off you are.''
For example, she says, a company with happy and healthy workers will probably not face unrest or strikes. And a firm that doesn't produce unsafe products or dump chemical waste is less likely to be sued.
Besides its money-market fund, Calvert has three others: an equity portfolio, a bond portfolio, and the largest, a managed growth portfolio. All four have about $250 million in assets. Demonstrating that these funds exercise as much, if not more, market savvy as the rest, they managed to escape the stock market's plunge last October with only a 4 percent loss for that week, while the Dow declined about 13 percent.
For the first six months of the year, the Calvert Growth Fund posted an average overall return of 11.63 percent. In the same period, the Standard & Poor's 500 index had a 14.6 percent gain, and the Dow Jones industrial average was up 16.6 percent.
One socially responsible fund that enjoyed excellent growth this year is the $8 million Parnassus Fund in San Francisco. During the first six months, it was ahead 39 percent, the fourth-best performer of all funds for the same time period. Unlike the others, Parnassus employs a ``contrarian'' investment strategy.
``We like to buy stocks that are out of favor with Wall Street,'' says assistant fund manager Andrew Rubinson. ``Then we look at management to see if they can lead the company to a comeback, and then we look at social criteria. We realize that there's no perfect company - so we like to pick the ones that on the whole are doing good things in the community.''
Which for some funds, depending on the stringency of their standards, is more complicated than it seems.
Franklin Research and Development, a Boston cooperative that screens companies socially and financially for potential investors, currently has 140 companies on its ``approved list of stocks.''
Ms. Chin at Calvert says about half of the 500 stocks in the S&P and two-thirds of those followed by Value Line meet its criteria. But the investment universe becomes narrower as funds tighten their standards, and some have as few as 25 stocks at one time.
For example, the Pax World Fund of Portsmouth, N.H., started 18 years ago by several antiwar clergymen, rules out some 60 to 70 percent of the stocks listed on the New York Stock Exchange. It stays away from arms makers, alcohol, tobacco, gambling, nuclear power, and unfair labor practices. Still, its assets have grown from $7 million in 1982 to $70 million today. And for the first six months of this year, its total reinvestment rate of return was 8.38 percent, the market average for balanced funds being 8.59 percent.
The $5.5 billion Pioneer I, II, and III, managed by the Pioneer Management Corporation in Boston are generally classified as the largest socially responsible funds.
But they don't consider themselves socially responsible as the term is used today, says John Carey, vice-president and portfolio manager. Its prospectus includes the founder's longstanding policy not to invest in liquor, tobacco, or gambling companies.
Pioneer does invest in defense, and doesn't screen companies for community ethics.