Why ethical investors fared a little better this quarter
Ethically minded mutual-fund investors took a pounding in the first quarter of 2008 along with everybody else, but observers have a cautiously encouraging message for them: Your favored methods may in some cases be blunting the pain.
Sharp sell-offs and emergency measures to stabilize credit markets marked a period that tested investors' nerves as the benchmark S&P 500 Index fell 9.4 percent since Jan. 1. Domestic equity funds tumbled an average of 10.1 percent.
But socially responsible (SR) funds, which bring moral values to bear on stock selection, on the whole suffered slightly less in the first quarter than their unscreened peers, according to data from fund tracker Morningstar. Domestic SR equity funds performed better than 56 percent of peer funds in their respective categories.
"As a group, they did fairly well," said David Kathman, a Morningstar mutual fund analyst with a subspecialty in SR funds.
On average, SR funds dropped a smarting 10.2 percent, according to Morningstar data. Dragging down the group's average performance figures were several small-cap funds that saw values slide 18 percent or more during the quarter.
Mr. Kathman posits that large-cap SR funds may be benefiting from jittery investors' search for recession-proof stocks. Investors in the first quarter dumped cyclically sensitive stocks, such as steelmakers, defense contractors, and other heavy industries, which SR funds routinely avoid anyway. By being light on heavy industry, these SR funds may have lessened the consequences of investor flight to steadier sectors in a sluggish economy.
SR funds are sometimes bullish on consumer staples, which have sometimes held up relatively well in prior economic downturns. This may help explain why, for instance, the MMA Praxis Core Stock Fund outperformed the S&P 500 Index by 1 percent, according to MMA Praxis Mutual Funds President John Liechty.
"The defensive sectors would be the PepsiCos, the Coca-Colas, [and] the big pharmaceuticals," Mr. Liechty says. "Consumer staples and the drug stocks are pretty much recessionproof, and we always have heavy exposure in those sectors."
Not all SR funds weathered the first quarter storm in relative comfort. Green funds, which focus on environmental issues and often invest in alternative energy, got clobbered as investors sought safer havens. Example: the Winslow Green Growth Fund, which had gained 23.5 percent in 2007, dropped 26.6 percent in the first quarter of 2008 – further than any other SR fund tracked by Lipper or Morningstar.
Analysts aren't certain whether rough times are past yet and they're not banking on first quarter results to be a reliable bellwether for the second quarter or the rest of the year.
"I wouldn't put much stock in what happened in the first quarter," Kathman says, "because it was such a strange quarter" in terms of unusual events precipitating wild volatility.
Still, particular strategies seem to be minimizing this year's hurt. Jeff Tjornehoj, senior research analyst at Lipper, notes that equity-income funds have benefited by owning blue-chip, dividend-paying, large-cap stocks. He says that SR equity-income funds fell less than 6 percent in the first quarter.
"These are not the type of investments that ever reach the top of performance tables," Mr. Tjornehoj says. "They're very steady."
On the downside, Tjornehoj notes some SR investors may continue to pay a price for their funds' heavy weightings in such struggling sectors as financials and high technology. But Liechty wonders whether today's beaten-down stock prices in hard-hit sectors might bode well for an impressive rally in due time – whenever that may be.
"If technology comes back strong," Liechty says as an example, "you're going to see a lot of SRI funds do well because they're usually overweight in technology."
