'Good Works' Investing Also Good for Pocketbook
'GOOD works" investing is growing increasingly popular in the United States. The number of mutual funds investing in "approved" companies has multiplied, as has the total amount of assets put into them. But the really good news about good-works investing is that it can be profitable, experts say.
Just as more people, for social or political reasons, are fussy about which companies they choose to do business with, so thousands of investors now routinely place their dollars, through mutual funds, in companies that pass rigorously defined social "screens." These funds select companies with exemplary records on the environment, women's rights, and workplace diversity. They shun firms that pollute, build military weapons, or are linked to alcohol, tobacco, or gambling.
In the case of mutual funds, Morningstar Inc., a Chicago-based rating company, monitors some 39 "socially responsible" funds. Socially responsible mutual funds, says Laura Lallos, a Morningstar analyst, can now be found in every avenue of investing from international stocks to large companies to small companies. But "only 17 of these funds have earnings records of three years or longer," she says. While performance records run from the mediocre to the excellent, some good-works funds regularly equal or outperform the Standard & Poor's 500 stock index. That's not bad, since "very few mutual funds" invested in stocks of any kind consistently manage to do that over time, Ms. Lallos notes.
For example, the Domini Social Equity Fund, a no-load stock-index fund based in Cambridge, Mass., has posted a total return of 41.3 percent since its inception in 1990. That compares to a total return of 43.6 percent for the S&P 500, a Domini spokesperson says. The fund, which requires a $2,000 initial outlay, does not invest in companies linked to tobacco and gambling and favors firms promoting good employee relations. It has other social screens in selecting investments.
Most of the newer mutual funds in this area are linked to existing families of socially responsible funds, such as the Bethesda, Md.,-based Calvert Group and Working Assets Common Holdings Inc., of Portsmouth, N.H., Lallos says. "Many of the larger families of mutual funds" don't establish good-works funds "because they find them to be somehow leftist or odd." Nonetheless, "there is no evidence" that using social screens "limits returns on investment," she adds.
On the contrary, a study released in April by Vanderbilt University and the Investor Responsibility Research Center, a social action group, finds that companies that are "cleaner," in terms of adhering to strict environmental standards, tend to perform as well or even outperform competing firms not as scrupulous.
One mutual-fund family that has one of the oldest "good works" funds is Dreyfus Corporation, which established the "Dreyfus Third Century Fund" in 1972.
Working Assets has just introduced a new index fund - the "Working Assets Citizens Index Portfolio." It holds about 300 companies in its portfolio - 200 of which are from the S&P 500 index. The other 100 companies the fund selected for their suitability are smaller. The screening process evaluates firms in terms of their financial performance and social, environmental, and human-justice records, "such as whether or not the firm discriminates in the work force," says spokesman Martin Fox.
Two other well-known social investing funds are San Francisco's Parnassus Fund, a growth fund requiring a $2,000 initial investment and having about $211 million in assets under management, and Pax World of Portsmouth, N.H., which requires an initial investment of $250 and has about $400 million under management. Founded in 1971, Pax World is perhaps the "granddaddy" of good-works funds. It avoids investing in defense and weapons firms and companies involved with tobacco, alcohol, and gambling.
One unusual new fund is Fidelity's Investment Charitable Gift Fund, launched in 1992. An individual or corporation gives money to the fund, which gives it out over time to a favorite charity or charities. But the donor takes an immediate tax deduction for the gift and avoids the expense of setting up a foundation. The fund requires a minimum investment of $1,000. So far, it has "made over $80 million in grants to over 10,000 charitable recipients," says Jamie Jaffee, president of the Boston-based fund.
Last November, the Fidelity fund launched a "pooled-income fund," which allows a tax write-off for the donor but also provides a return of taxable interest income over his or her lifetime. Many institutions, such as churches and universities, offer similar portfolios. But Fidelity's gives a person flexibility in contributing to several charities at once, not just that of the sponsoring charity.