Enthusiasts call them socially responsible investments (SRIs). Agnostics call them socially conscious investments. Skeptics deride them as politically correct funds. For many financial advisors, the idea of investing client dollars in a mutual fund has about all the appeal of donning a hemp suit.
The common knocks against SRI funds are that they carry high expenses, limit an investor's options and lag in performance behind mainstream funds. More important, many advisors bristle at the idea of mixing politics with investment decisions.
"It does narrow the universe very significantly," says Rob Moody, president of Compass Advisors in Atlanta. "I'm not sure what I would do if I had a client who insisted they invest in a socially responsible manner. I might decide not to work with them because to me it doesn't make any sense."
But while the wisdom of socially responsible investing is debatable, one thing isn't: SRI investing is on the rise and nudging its way into the mainstream. A recent survey by the Social Investment Forum found 230 mutual funds socially screen their holdings, which is up from 175 in 1999 and 55 in 1995.
The amount of assets in socially screened professional portfolios-including mutual funds, separately managed accounts and pension funds-topped $2 trillion this year, up from $1.49 trillion in 1991.
Social funds also are breaking the stigma that they're poor performers. The 70 SRI funds tracked by Morningstar, for example, have outperformed the S&P 500 in recent years, and some funds, including the Domini Social Equity Fund, has been among the company's highest-rated funds.
Some big names, meanwhile, also are getting in on the act, such as Vanguard, which joined with the Calvert Group to start the Vanguard Calvert Social Index Fund last spring. Other large companies are adding socially screened options to their retirement plans and their institutional accounts.
It's the type of growth that may force even skeptical advisors to take notice, observers say. "A lot of companies are including it in their pension accounts and 401(k) plans," says Morningstar analyst Catherine Hickey. "That to me is mainstream."
What's behind the growth? Part of it, observers say, is simply due to the fact that more investors know about the social-investing option. In turn, more options are available to those who want to pursue it.
That means social screening is coming into play in an area of investing where, just a few years ago, it didn't exist. Debra Neiman, of the Neiman Maloy Financial Group in Wakefield, Mass., says that when she started getting involved in socially responsible investing five years ago, it was more or less a sideshow to the mainstream investing world.
Now, she says, it's common for clients to bring the issue up when it comes time to line up mutual funds for their retirement accounts. "It really comes into play when people are leaving their former employers and doing 401(k) rollovers," Neiman says. "It gives people a chance to kind of align their morals and values with their investment decisions."
Opportunities to do that seem to be increasing. A 1999 survey by the Calvert Group found that 35% of 800 randomly selected investors had the ability to chose socially responsible options in their retirement plans. That was up from 16% in 1996, says Calvert spokeswoman Elizabeth Laurienzo.
That has been reflected in the sales figures of Calvert's 12 socially indexed mutual funds, she says. As of September 30, Calvert funds were options in 435 retirement plans, compared with 95 three years ago. Mutual fund sales tied to retirement plans grew 66% in 2000 and were up 48% in 2001 as of November, Laurienzo says. "That says to me that more and more people are believing they need to add such an option because of demand," she says.
Pamela Christensen, president of Financial Disciplines in Sacramento, Calif., feels investors are taking a step back after the high-flying 1990s and reassessing their priorities. Much in the same way people are leaving high-stress jobs, cashing in stock options and seeking to improve the quality of their lives, some investors are looking for more meaning in what they do, she says.
"It's spillover over into their investing criteria," says Christensen, who does SRI investing for about 30% of her 80 clients. "They're looking for not only the returns on their investments, but they're looking for what kind of a difference am I making in the world by my investing activity."
At the same time, more avenues have opened for social investors in the form of mutual funds and separately managed accounts. SRI funds themselves have diversified, with some devoting themselves to niche issues such as labor practices, the environment or women's rights.
Another branch of social investing, often called morally responsible investing, screens companies on the basis of religious beliefs. At the same time, Web sites such as SocialFunds.com and SocialInvest.com have made it easier for investors and advisors to screen companies and funds.
"I would say over the past two years, they've become much more prevalent, and within that two-year period, made some big strides relative to making them more operator-friendly," says Dennis Carpenter, president of International Wealth Management in Grapevine, Texas.
Solid performance by some social funds also has made them more palatable to investors, observers say.
The 70 social funds tracked by Morningstar, for example, had a year-to-date loss of 11.48% as of November 30, compared with a decline of 12.64% for the S&P 500. Such were the yardsticks of success in 2001. On a three-year annualized basis, the SRI funds averaged returns of 2.95%, compared with .55% for the S&P 500.
Among the top performers have been the Citizens Value Fund, with a year-to-date return of 13.87% and a three-year annualized return of 14.43%; the Parnassus Income Fixed-Income Fund, with a year-to-date return of 13.70% and a three-year return of 4.40%; and the Ariel Appreciation Fund, with a year-to-date return of 11.77% and a three-year return of 10.69%.
"People have seen over time that the performance equals that of the general marketplace," Morningstar analyst Annette Larson says. The improved performance has figured into the continued growth of socially responsible investing, although not everyone agrees by how much.
Carpenter says that the average socially responsible investor typically will put more importance on a fund's screening methods than on what type of returns it gets. "Clients are generally less concerned about rate of return and more concerned about what their dollars are doing," he says.
Others cite performance as the key factor behind the growth of SRI funds. Steve Schueth, president of First Affirmative Financial Network, an SRI investment-advisory firm in Colorado Springs, Colo., feels that some people have stayed away from SRI funds under the assumption that they are poor performers.
"I think the primary place to attribute the growth is to performance," he says. "Academic studies, as well as real life experience, are showing that socially conscious investors don't have to give up everything in terms of performance. I think the more folks who understand that, the more folks who are willing to give it a try."
He says this message still needs to be emphasized in the financial advisor community. "Basically, there is a lot of ignorance among advisors about how well socially responsible investments have performed the past decade," he says.
But even proponents of social investing say that because so many SRI funds are new, with little history to go by, they sometimes can be a hard sell. Added to this is the fact that many of the funds have relatively high expense ratios because they are small and lack the economies of scale of some of their mainstream competitors.
Steve Thalheimer, principal of Thalheimer Financial Planning in Silver Spring, Md., says this is why he often turns to the Domini Social Equity Fund to address the needs of socially conscious clients. "As I explain to people, this is still a very new field, and as time goes on, we'll have more data to work with on these funds," Thalheimer says. "I'm hesitant to recommend something that has a three-month track record."
Less clear, it seems, is whether the growth in SRI investing is a result of investors growing more socially conscious. Some advisors say they have noticed increased interest among their clients in SRI investing, but there are others who have seen no change.
The number of social and political issues being used by social investors, meanwhile, continue to rise. Tobacco, weapons, alcohol, the environment, human rights and gambling remain the top issues among social investors, according to the Social Investment Forum. International labor issues, dealing with worker safety, equitable pay, etc., are becoming a prominent issue in the field.
History has shown that the list of issues will rise, says Alisa Gravitz, of the Social Investment Forum, as investors get more experienced with social investing. A recent study found that investors who start social investing with one issue in mind will add about three more issues within two to three years.
This is what has happened since the 1980s, when the South African apartheid issue gave birth to the socially responsible investing movement. When apartheid ended, however, the movement continued as investors seized upon other issues, Gravitz says. "We're just amazed that this is what's happened."
Then there are those who expect the terror attacks of September 11 to stimulate interest in this type of investing. "I think what it will do is help people realize that money isn't everything," says Kenneth Frenke, president of Kenneth Frenke & Co., a financial advisory firm in Arden, N.C. "I think that is going to extend over to the way they even invest their money."