Value Added


5 Great Socially Responsible Funds

Steven Goldberg

Doing good and doing well in mutual funds is easier than it once was. But be prepared to make compromises investing abroad.



Can you earn healthy profits on your investments while helping to make the world a better place? I think you can if you choose your funds carefully. But watch out when you try to combine socially responsible investing with foreign stocks. (Kiplinger's prefers the phrase "socially screened" so as not to suggest that other kinds of investing are socially irresponsible.)

Traditionally, socially responsible funds have come from the left side of the political spectrum, excluding companies involved with tobacco, alcohol, gambling and weapons. Newer funds have added requirements in such areas as corporate governance, workplace standards and a company’s environmental record. In recent years, right-leaning funds have also emerged. For example, some won’t invest in companies that make products used in abortions.

Although social screens have changed, the quality of the funds generally hasn’t. Most are mediocre. What’s more, many of them overcharge -- a dubious way to practice social responsibility.

But a handful of funds are first rate -- good enough for any investor to own, regardless of his or her values. Following are my picks, as well as suggestions for their weightings in a portfolio.

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Parnassus Equity Income (symbol PRBLX) is, in my opinion, the best in breed (see A Terrific Socially Responsible Fund). It returned an annualized 6.9% over the past ten years. That put it, according to Morningstar, in the top 1% among large-company-blend funds -- those that invest in stocks with a blend of growth and value attributes (all returns are through December 13). Yet the fund has been 12% less volatile than Standard & Poor’s 500-stock index.

Manager Todd Ahlsten has been with Parnassus since 1994 and has piloted Equity Income since 2001. He uses a variety of methods to look for stocks selling at a steep discount to his estimate of the true worth of the underlying companies. Expenses are 0.99% annually. Make this fund 30% of your stock investments.

Except for the social screens it applies, Neuberger Berman Socially Responsible (NBSRX) is a clone of Neuberger Berman Guardian (NGUAX). Socially Responsible returned an annualized 5.2% over the past ten years, putting it in the top 8% of large blend funds (Guardian returned an annualized 3.8% over that period). Four managers run Socially Responsible, the most tenured being Arthur Moretti, who has been on the job since 2001. They hunt for good companies that have suffered setbacks that they believe will be fleeting. Expenses are 0.94% annually. Put 20% of your stock money here.

Appleseed (APPLX) is the most eclectic of these funds. It currently has one-third of its stocks in giant companies such as Pfizer; one-quarter in tiny companies; and 15% of assets in exchange-traded funds that own gold bullion. At last word, Appleseed’s five managers had money in just 19 stocks, and 18% of assets sat in cash. Appleseed, which launched in late 2006, has returned an annualized 10.4% over the past three years, putting it in the top 1% of midsize value funds (although the fund invests in companies of any size, Morningstar does not have an “all-cap” category so it considers the size of Appleseed’s holdings to be midcap ). Expenses are 1.17% annually. Put 15% of your stock money in this one.

Winslow Green Growth (WGGFX) costs too much (1.45% annually), is too volatile (63% more than the S&P 500 over the past three years ) and imploded during the 2007–09 bear market, tumbling 71.0%, while the S&P 500 dropped 55.3%. Thanks in great part to that disaster, Green Growth lost an annualized 3.2% over the past five years. Despite this, I admire manager Jack Robinson’s ability to pick growth stocks. Results for private accounts run by Robinson and his team have produced far better results over longer periods of time. Still, this is a risky fund; put just 5% of your stock money in it.

Vanguard Intermediate-Term Tax Exempt (VWITX) doesn’t bill itself as socially responsible. But what else would you call a fund that invests in high-grade municipal bonds issued by states and localities for such purposes as school construction, roads, hospitals and sewage treatment plants? Invest your taxable bond money in this fund, which pays interest that is exempt from federal income taxes and yields 3.0%. That’s the equivalent of 4.6% for a taxpayer in the highest federal bracket. Expect the fund to lose a bit less than 6% should interest rates climb by one percentage point. Expenses are just 0.20% a year.

I’ve left foreign funds for last -- because none impress me. The best I can find is Domini International Social Equity (DOMIX). Domini has contracted with highly regarded Wellington Management to run the fund. But that’s all this fund has going for it. The nearly five-year-old fund plunged an annualized 9.2% over the past three years, and annual expenses are, at 1.69%, too high.

Instead of Domini, I think you should split your foreign-stock investments between two traditional funds. Put 15% in Oakmark International (OAKIX), which I wrote about just two weeks ago (4 Plays for Contrarian Investors). Invest the other 15% in Vanguard Emerging Markets ETF (VWO), an exchange-traded fund that gives you broad exposure to emerging markets for just 0.27% annually.

No, I don’t like the fact that Oakmark International skipper David Herro has 2% of assets in Japan Tobacco -- tobacco companies being the only companies that I personally find socially abhorrent. But I’m prepared to compromise my principles to access Herro’s talents.

Steven T. Goldberg (bio) is an investment adviser.



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