Sickened by corporate scandals, spooked by negative earnings surprises and unsure where the economy is headed, investors recently have been pulling their money out of stock funds. But one type seems to be weathering the redemption storm a little better: socially conscious stock funds.

According to data from Lipper, a subsidiary of Reuters that tracks fund flows and performance, $51.7 billion flowed out of U.S. diversified equity funds in June, July and August. Of that, a record-breaking $35.6 billion hemorrhaged in July alone. Socially conscious equity funds actually had positive inflows in June and August, but lost $120 million in July.

From December 31 to August 31 (the latest month for which figures were available at press time), total net assets of U.S. diversified equity funds dropped 18.3% to about $1.97 trillion, Lipper says. By contrast, Lipper data shows total net assets of socially conscious equity funds dropped only 3.4% to approximately $11.37 billion.

Tom Roseen, a Lipper research analyst, says observers must be careful not to overstate what the numbers mean. "But when a person has a conviction to go into a particular type of fund, whether it's based on Catholicism or Islam or whatever, there is some stickiness. They know that's the only alternative."

Anita Green, director of social research at Pax World Funds in Liberty, Mo., believes the general public is angry over the flagrant corporate abuses that have surfaced over the last year. And she thinks that has made more investors turn to socially responsible investing (SRI). "I do think it's a reaction," she says. "I don't have scientific evidence, but I think there is a link."

Timothy Smith, president of the Social Investment Forum, the national trade association for the SRI industry, says it's hard to pinpoint why socially conscious equity funds seem to be doing a better job at holding on to assets than U.S. equity funds as a whole. "But at least my sense, as president of the forum, is that numerous individuals are distressed by scandals and concerned as their portfolios have rapidly decreased. They're looking for managers committed to the double bottom line-financial returns and social returns," says Smith, who also is senior vice president at Walden Asset Management, a Boston firm that manages $1.3 billion in separate accounts for individuals and institutions.

But can socially conscious vehicles, sometimes derided as politically correct funds, perform as well as other equity funds? Socially conscious equity investments are competitive with other classes, but they certainly haven't escaped the bludgeoning other equity funds faced over the last few years with the bursting of the stock market bubble. Lipper says that as of September 30, the cumulative total return of socially responsible equity funds was -26.63% for the first nine months of 2002, -17.1% over the last year, -9.19% for the last three years and -1.64% over the last five years. U.S. diversified equity funds lost 26.57% for the first nine months, 16.26% over the last year, 8.41% for the last three years and 2.27% for the last five years.

For the last decade, Smith says, an often-heard myth is that socially conscious investors are going to make less money compared with conventional investors. "It's a nonsensical argument. [The] managers pick and choose, but nonetheless it's almost treated like a religious mantra among conventional investors. We have stated again and again that there is no conscience penalty," he says.

Adam Kanzer, general counsel and director of shareholder advocacy for Domini Social Investments, based in New York, agrees. "First of all, there's kind of a misconception that socially responsible investing has nothing to do with any standard kind of due diligence that a manager would undertake, that it only looks at social issues. That's not true," he says. "For actively managed SRI funds, their investment managers go through the same financial analysis any manager would use, but they also do social and environmental analysis."

And SRI managers are the first to note that social and environmental issues can have a financial impact. "The SRI industry believes social and environmental performance does impact the bottom line. Most of these issues are long-term performance issues, but we're long-term investors," Kanzer says.

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