Socially responsible equity funds get the lion's share of attention these days, but SRI bond funds may be an attractive alternative for some of your clients' portfolios.    SRI bond funds are a small but growing niche within the broader bond fund market. Their holdings range from funds incorporating corporate debt, mortgage backed securities, low income housing, small businesses, economic development projects, infrastructure, affordable health-care firms, to job creation programs, neighborhood revitalization activities, to energy, green buildings and green-tech companies, according to the Social Investment Forum, an organization that promotes socially responsible investing.

Socially responsible investing funds typically screen out companies that produce products such as alcohol and tobacco or have practices deemed undesirable, such as poor pollution records.

Lately, a number of SRI bond funds are registering above average returns-including MMA Praxis Intermediate Income Fund (MIIAX), Calvert Social Investment Bond Portfolio (CSIAX), Domini Social Bond Fund (DSBFX) and the Parnassus Fixed Income Fund (PRFIX).

Pity the poor bond funds, though. Like Rodney Dangerfield they get no respect. The reason: Many investors consider them boring even though they dampen the ups and downs of the market. Still, if outperforming stocks over the last 10 years is boring, managers at the MMA Praxis Intermediate Income Fund will take boring any day.

"We had our best performance versus our peers during the market upheaval of 2007 and 2008,"said Delmar King, who has managed the fund since inception in May 1999. "Near the start of the market stress in 2007 we had our corporate weight nearly the same as our index (Barclays Aggregate). We doubled our corporate bond weight over the next year and a half as corporate bond prices fell, and we began to be paid for the risk in that sector."

"We consider ourselves a faith-based SRI fund with a strong awareness of green issues," adds King. "Finding innovative high-social impact market rate investments with an emphasis on renewable energy has been one of our priorities."

As evidence of the group's performance over the past decade, the Barclays U.S. (formerly Lehman) Aggregate Bond Index, often considered a proxy for the bond market, outperformed the S&P 500 Index by 6.75%, on average, per year over the last 10 years, ending Feb. 28, 2010.  Stocks on the other hand, bested bonds as measured by the Barclays index over the trailing 15 years by a small margin, "but they did it by being exposed to significantly more risk," maintains Benjamin Bailey, the fund's co-manager.

The MMA Praxis Intermediate Income fund, with $259 million in assets, has returned 5.20% since inception. Year to date through March 8, 2010, it has returned 1.78%. Morningstar gives it three stars in the Intermediate Income Category for the Front End Loaded A share and four stars for the Load Waived A share for fee-based planners. The fund has an expense ratio of 1.21%.

The fund has made the inclusion of market-rate, high-social impact investments--particularly green investments--a priority in recent years. To date, over 5.5% of the fund is held in investments supporting renewable energy, economic development, community infrastructure, education and medical research. Additionally, another 1% is dedicated to below-market community development investments across the U.S. and around the world.  

The fund not only serves as ballast to stabilize investment portfolios, it extends MMA's investing philosophy in the form of targeted investments in renewable energy infrastructure projects often backed by large well-financed utility companies. While some equity SRI funds specifically target investments in renewable/green energy, many of the companies in which they invest are smaller, younger companies that may or may not succeed, Bailey points out.

Among the largest and oldest SRI bond funds is the $863.6 million Calvert Social Investment Bond Portfolio (CSIBX), an intermediate term bond fund skippered by bond veteran Gregory Habeeb.

Habeeb has helmed the fund since 1997 assisted by five analysts and four portfolio managers from Calvert's fixed-income team. From Calvert's trading desk at Bethesda, Md., headquarters, he also helps manage four other Calvert bond funds controlling about $7.5 billion in assets under management.

Calvert's SRI bond fund must pass Calvert's sustainability screens, which assess governance, ethics, workplace programs, environmental processes, and product safety and impact, among other factors. Core holdings consist of bank and finance, 23% of total assets; industrial bonds, 15%; municipal bonds, 12.5%; special purpose entity bonds, 6.5%; and MBS and ABS, totaling 9%.

The fund has returned 6.08% since inception in August 1987, and is up 1.95% YTD through Feb. 28, 2010. The fund carries a load of 3.75% and an expense ratio of 1.15%.

Calvert's SRI bond fund was No. 1 in overall performance in the Lipper single A bond class in 2002, and has won numerous Lipper awards over the last decade. It was No. 1 in performance in Lipper's single A bond class for the 5 and 10 years through 2007.

Habeeb and his team favor undervalued bonds with what they think is strong appreciation potential, specializing in uncovering assets with complex and unusual structures. Normally, however, the fund invests at least 80% of net assets in investment grade securities rated A or above.

The fund is 20% in cash. Habeeb said the fund's higher than normal turnover rate--77%--iis not reflective of the risk of the fund.

"The average credit rating or credit quality of the fund's assets is AA--and has been in the double A range for several years, so we tend to have a high quality fund," says Habeeb. "Our average exposure to high yield has been 5% for the last 10 years," he adds.

Habeeb notes the fund's current duration rate--a measure of interest rate sensitivity--iis 3.4 years, lower than a more typical 4.5-5.5 years in keeping with the current low interest rate environment.

"We like activity. We're always looking to make relative value adjustments to improve the risk-return profile of the fund," says Habeeb. "So a big part of our job on a daily basis is to look and see something that will improve the performance of the fund."

Another SRI fund worth investigating is the no-load Domini Social Bond Fund (DSBFX), an intermediate term bond fund with more than $100 million in assets. Since inception in June 2000, the fund has returned on average 5.6% annualized through Feb. 28, 2010. The fund carries an expense ratio of 0.95%.

Domini Social Bond fund ranks in the top 20% of its peers in each of several Lipper categories, including tax efficiency and preservation. Morningstar gives it three stars. The fund's holdings hold an average credit rating of AAA, according to Lipper.

One distinguishing feature, according to Domini, is that up to 10% of its holdings at any one time are invested in community development financial institutions that revitalize communities across the country. Ginnie Mae and Fannie Mae bonds, mortgage pass through bonds, and U.S. corporates largely make up the balance.  

"We've been pleased with the recent performance of the fund in these difficult times," said Steve Lydenberg, chief investment officer for Domini. "Domini has traditionally avoided Treasuries in its fixed-income selections consistent with our concern about nuclear weapons."

These funds are not without risk, however. Investors interested in socially responsible investments should look at them as investments first and socially responsible offerings second, said Michael Herbst, a fund analyst at Morningstar. Investors should determine the socially responsible strategy, he said, "because that may mean the manager may avoid certain parts of the bond market and be more concentrated in other parts of the market. That's not necessarily a danger, especially for these funds because they are all considered fairly basic core type holdings."

" For example, a fund that's more concentrated in corporate bonds is likely to behave differently than one concentrated in government bonds. It's more having a better sense of what to expect from the fund than it being a risk."

One commonality in these three funds, Herbst noted, is their above average expenses. That could be a risk because it "means the manager will have to take on more overall risk to deliver competitive returns," said Herbst.

Bruce W. Fraser, a freelance financial writer and editorial consultant in New York City, writes frequently for Financial Advisor magazine. He can be reached at [email protected] <mailto:[email protected]> ; visit him at