Financial advisors should take a closer look at a recent report on SRI fund performance.
The report was done by the Social Investment Forum, which found that 65% of 143 mutual funds from member fund families outperformed their benchmarks in 2009. One year's results, of course, aren't sufficient to form the basis for an investment choice, but some interesting observations can be made and questions raised by reviewing the average annual returns chart, which also provides three-year, five-year and ten-year results at December 31.
Here's the good, the bad and the ugly:
Within their asset category, most of the SRI funds studied outperformed their benchmark in 2009. The exceptions were International Equity-EAFE, in which only 31.3% beat the benchmark, and U.S. mid-cap, where 33.3% did.
The number of SRI funds to choose from, at least based on the number that are SIF members, more than doubled in the last ten years, providing many more choices for retail investors. The number of choices have increased in all the asset categories studied, making it much easier it build a diversified portfolio of SRI funds for clients who prefer this kind of portfolio.
Large-cap funds still dominate the SRI landscape and have the most impressive performance as a group among the asset classes. SIF looked at 73 large-cap funds, about half the total evaluated based on 2009 results. Sixty-four SIF-member funds were around long enough to be evaluated based on ten-year performance, and half of those also were large-cap funds. If you picked a large-cap SRI fund for the long term you probably had a decent chance of besting the S&P: 62.5% beat the S&P's ten-year return of -0.95% and 50% beat its three-year return of -5.63%. Five-year returns didn't stack up so well: Only 36.6% of SRI funds beat the index's -0.41% return.
All the SRI funds in the international equity-global category beat their benchmark-MSCI World-at one, three, five and ten years. However, only five funds were evaluated in 2009 and only one-Portfolio 21-was included for the longer-term periods. Portfolio 21 was a standout though, returning 31.15%, -2.26%, 4.24% and 3.33% at one, three, five and ten years, respectively.
In the other five asset classes-U.S. mid-cap, U.S. small cap, U.S. balanced, U.S. fixed-income bonds and international equity-EAFE-SRI performance as a group was weak at three, five and ten years. During those three time frames, no more than one-third of the funds in any of those asset classes beat their benchmarks. Five-year performance was particularly dismal: No SRI fund outperformed its benchmark except in the U.S. fixed-income bond category, where one in 13 did.
The percentage of SRI funds overall beating their benchmarks at three, five and ten years was 32.7%, 21.5% and 37.5%, respectively. Picking a fund a decade ago that would have ended up doing better than its benchmark looks like it would have been very challenging.
Still, the significant performance turnaround for SRI mutual funds as a group in 2009 makes these funds worth watching for many investors. In the last few years, more SRI mutual funds have added positive screens for environmental, social and governance (ESG) factors rather than focusing so heavily on screening out "sin" stocks: those that are involved in industries such as alcohol, tobacco, gambling and defense.