Green; Not so Green: The Pluses and Minuses of Socially Responsible Mutual Funds

You have changed all of the light bulbs in your house, disconnected all of the energy draining electronic cords and insulated your abode in an effort to not only conserve. But to go green. Have your investments taken a similar path? Are your efforts at finding a mutual fund that ascribes to your values proving difficult? Perhaps it is time to look at socially responsible mutual funds.

While these types of funds have been around for decades, the attractiveness of them has been thwarted by some extra considerations that most investors don't feel is worth the cost. And there are costs.

But first, let's discuss what these funds are and what they are try to do for the investor. Mutual fund managers do not have an easy time finding the companies they need to create an efficient (tax-wise and fee-wise) portfolio of stocks and securities. The reasons are simple: not that many companies comply with the strict definition of what a socially responsible mutual fund is.

One of the attributes is Corporate governance and ethics. While most companies say they act ethically and govern their shareholder's investment with care, far too many fall short. Add to that the issue of how they treat their workers, the quality of the products they produce, which can lead to yet more concerns about the environmental and how what they do impacts the community around them.

A great many businesses have made strides in all of these issues but progress is slow and sometimes scattershot. More difficulties arise when these companies deal with people and workers living overseas. Not only is the politics of the country in which these employees might work at issue but so is how the indigenous people are being treated.

These qualifiers leave the choices dramatically whittled down. Some funds take the list even further, culling out those companies that don't share moral or religious beliefs. But socially responsible investors are on the right track and through their efforts over the years, many disclosures about how proxy votes (those done by your fund manager with your permission) are cast. Also eveidence of this movement has forced many major corporations to begin to "clean-up their acts".

These are all pluses. What about the minuses? Many of the funds who invest in this way use the KLD400 index as a guide, much like the Standard & Poors company provides for index funds less focused on these concerns. That index, according their site looks for "Companies involved beyond specific thresholds in alcohol, tobacco, firearms, gambling, nuclear power and military weapons are not eligible for the KLD400. Companies that do not meet KLD’s financial screens (market capitalization, earnings, liquidity, stock price and debt to equity ratio) are also ineligible for inclusion."

The company tracks numerous other sectors, indexing sustainable companies from the total market down to small caps, Catholic to Select Social Indexes. The cost for research for these funds, even when using the index as a guide tends to be higher than for other actively managed or indexed funds. That would be a minus.

Yet, closer examination of these indexes finds that what usually haunted potential investors, overall return has improved dramatically, in many cases, beating comparable indexes published by S&P or the FTSE (an independent company jointly owned by The Financial Times and the London Stock Exchange).

If you approach these investments in the same way you do other investments, with an eye on cost, performance, tenure of the fund manager and low overall turnover in the portfolio, you will get good results from your flight to value. In fact, you will find many of the indexes listed below actually did better than their less-researched, less sector constrained counterparts.

Socially Responsible funds are sector funds in the purest sense of the word but in many instances lack the volatility of other sector funds. And considering the values these underlying companies are trying to achieve, some on their own, others at the behest and urging of the communities in which they operate, this movement isn't leaving any time soon. And that should have a positive effect on returns and ultimately, as demand grows, the fees.

Returns on the the following indexes and comparable indexes are as of 09.30.09 for a one year period (which includes one of the more devastating years for the stock market):

U.S.
FTSE KLD 400 Social Index (KLD400) -3.69%
S&P 500 -6.91%
FTSE KLD Catholic Values 400 Index (CV400) -3.55%
FTSE All World USA -6.44%
FTSE KLD US All Cap Sustainability Index (USSA) -6.04%
FTSE US All Cap -6.30%
FTSE KLD US Large Cap Sustainability Index (USSL) -6.81%
FTSE US Large Cap -7.31%
FTSE KLD US Mid Cap Sustainability Index (USSM) -1.14%
FTSE US Mid Cap -3.49%
FTSE KLD US Small Cap Sustainability Index (USSS) -6.92%
FTSE US Small Cap -5.53%
FTSE KLD US Large-Mid Cap Sustainability Index (USSLM) -6.65%
FTSE US 500 -6.57%
FTSE KLD US Small-Mid Cap Sustainability Index (USSSM) -3.29%
FTSE US Mid Cap -3.49%
FTSE KLD Select Social Index (SSI) -6.65%
FTSE US 500 -6.57%


Addditional info for you, the greening investor, can be found here.