Like many investment professionals, Ingrid Dyott, co-portfolio manager of the Neuberger Berman Socially Responsive Fund, finds it difficult to quantify the impact of environmental, social and governance criteria on investment performance. "We also look at many other things, such as strong balance sheets, management, cash flows and valuations," she says. "All of them matter when you're evaluating a stock, so you can't place blame or credit for performance on any single factor."

Regardless of their views on the impact of ESG criteria on returns, socially responsible fund managers like Dyott are under as much pressure as their industry peers to beat their benchmarks. "Maintaining the integrity of an SRI framework is very important to us, but the bottom line is you can't stay in this business unless you put up solid numbers," she observes.

The last three years have been particularly challenging for equity mutual funds seeking to achieve that goal, and SRI funds are no exception. As the market plunged in 2008, soared in 2009 and bounced around in 2010, some funds turned in solid returns, while others struggled. Ultimately, performance had as much to do with limiting losses as maximizing gains, and successful SRI fund managers over the period found different routes to doing both.

The $1.2 billion Calvert Social Investment Equity Fund's top decile rank among Morningstar's large-cap growth funds for three-year performance came after beating its average peer by more than five persent points in 2008. Performance was also aided by a strong showing in 2010 from stocks such as Netflix, the largest holding at the end of the third quarter. Manager Richard England believes the company has a firm hold on the digital movie rental business and should continue to benefit as brick-and-mortar competitors fall by the wayside. Apple, the fund's second-largest holding, has been buoyed by the continued popularity of its iPad and speculation about the launch of a Verizon-compatible iPhone early next year.

The Neuberger Berman Socially Responsive Fund, a large-cap blend offering, has beaten the average fund in its category in eight of the last nine calendar years, and was among the top performers in the group in 2010. Dyott attributes the strong track record to good stock selection over a large number of industries rather than concentrated bets on any one sector.

Instead of eliminating certain industries or sectors, as some SRI funds do, this fund invests in firms in a particular sector with the cleanest slates. In the industrial sector, for example, the focus is on "lighter" industrials such as furniture manufacturer Herman Miller, which makes ample use of alternative energy in the manufacturing process. Another industrial holding, Canadian National Railway Company, helps save energy by taking market share from gas guzzling long-haul trucking firms.

Even though large-caps represent the most dominant SRI fund category, a number of small- and mid-cap stock funds have also beaten their benchmarks over the last three years.

Ariel Appreciation, one of the oldest and largest SRI funds, rose to the top 5% of the mid-cap blend pack in 2009 with a total return of nearly 63% but has lagged the group average so far this year. Despite some difficult years, the fund's outperformance in others has produced impressive long-term returns, driven in part by manager John Rogers' willingness to stray from benchmark weightings. At the end of the third quarter, for example, the fund had 41% of its assets in consumer discretionary stocks, compared to 11% for its benchmark index.

Rogers challenges the widely held view that high-quality large-cap stocks will lead the market higher and believes that reasonably priced small- and mid-caps will continue to shine in 2011. Some health care stocks, which have lagged the market this year, look particularly cheap and could be due for a rebound. "In my 28 years in this business I never thought I could buy industry leaders in the heath-care business at such modest price-earnings multiples," he says.

Appleseed Fund, another mid-cap value offering, climbed 60% in 2009 and slid half as much as that bogey the year before. But with a large allocation in cash, the fund fell toward the bottom of its peer group in 2010. Still, its strong performance in 2008 and 2009 provided the push it needed to pull to the top of its peer group over the last three years.

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