Socially conscious investing lets people put their money where their ideals are.

While all investments took their lumps over the past year, mutual funds that employ environmental, social and corporate-governance screens have been gaining serious investor attention.

Trends seem to be shifting in their favor.

"More companies are developing sustainability programs, which creates a wider field of companies whose stock can be purchased by funds like ours," said Adam Strauss, co-portfolio manager of the $61 million Appleseed Fund (APPLX), up 47 percent this year. "The big issue is climate change and carbon emissions, with a lot of companies looking to improve."

Philosophies of socially conscious funds differ from fund to fund. Strauss' $60 million mid-cap value fund focuses on firms that "balance profit generation with an awareness of their impact on the environment and society." It also wants the right price, limits itself to a small number of stocks and exerts patience awaiting results.

Strauss admires his holding Dell Inc. (DELL) for its ambitious goal of becoming the "greenest tech company on the planet." It has been a "first mover" on many environmental initiatives, and founder Michael Dell discusses sustainability with shareholders, Strauss noted.

Another favorite is Johnson & Johnson (NYSE: JNJ), which has long featured employee-friendly and environmentally friendly policies. In particular, its sustainability program has been in place for years, said Strauss, who invests a considerable sum of his own money in his fund.

Somewhat less conventional are his fund's shares of John B. Sanfilippo & Son (JBSS), a company known for nuts and trail mix, and SPDR Gold Shares (GLD), an exchange-traded fund investing in gold bullion. More than one-fifth of portfolio is currently being kept in cash until Strauss can find better alternatives.

"Socially conscious investors tend to be 'big picture' in nature because they're in it for more than the money," said Steve Schueth, president of First Affirmative Financial Network, a nationwide group of investment advisors who work with socially conscious investors. "The limelight is now much stronger on green companies, defined as those emphasizing energy efficiency, savings and alternative energy production."

Just as philosophies differ, so does performance. Nobody wants to own a do-gooder fund that consistently loses money.

"Some socially responsible mutual funds steered clear of the big banks, so that's one difference," said Russel Kinnel, director of mutual fund research for Morningstar Inc. in Chicago. "But most equity mutual funds in general got killed last year."

That doesn't mean there aren't opportunities. Here are three socially conscious funds that Morningstar believes merit serious consideration for major roles in investor portfolios:

-- The $731 million Domini Social Equity Investors Fund (DSEFX), up 29 percent this year, eliminates companies involved with alcohol, tobacco, firearms, gambling, nuclear power or weapons contracting. It also favors strong records on the environment, workplace diversity and employee relations. Largest holdings include IBM, Microsoft Corp. and Apple Inc.

-- The $1.9 billion Pax World Balanced Fund (PAXWX), up 18 percent this year, incorporates environmental, social and governance guidelines in its stock and bond portfolio. Qualcomm Inc., PepsiCo Inc. and CVS Caremark Corp. are significant holdings.

-- The $423 million Vanguard FTSE Social Index Investors Fund (VFTSX), up 30 percent this year, is an index fund whose social screens exclude alcoholic beverage and tobacco makers, as well as firms with unfair or unsafe labor practices and poor environmental records. J.P. Morgan Chase & Co., Intel Corp. and Amgen Inc. are major holdings.

"Investors should be sure to understand a fund's approach to creating a socially responsible portfolio and be sure it matches their own values," said Strauss. "Then look at performance, because just as there are good and bad funds outside of socially responsible investing, there are within it as well."

Schueth's First Affirmative Financial Network in Colorado Springs, Colo., has 120 professionals across the country who turn to the network to manage money for clients interested in socially conscious investing. Its $580 million in assets was referred to it by that network of advisors.

"We've seen continued growth not only in new money coming into the socially conscious investing industry, but in new products launched," Schueth said. "Diversification is always a winning strategy, and in socially responsible funds we now have the luxury of more investment choices that we didn't have eight years ago."

There's nothing wrong with getting professional help to accomplish your philosophical and performance ends, especially since finding the right mix to suit your ethics isn't always easy.

"Just as you can hire a fund to make socially conscious investments for you, you can hire financial planners to do the same," said Kinnel. "If you do the latter, the advantage is that you can set the criteria by customizing your portfolio to include or exclude whatever you wish."

Religion, war, apartheid, defense and tobacco have each taken turns as the lead consideration in socially conscious investment. Green is now leading the way, but past and future concerns linger. But no matter what the screens, investors demand a decent return.

"Socially responsible investors tend to be more long-term oriented than the typical mutual fund investor, so they've probably stuck out this latest downturn a bit better," said Strauss. "Nonetheless, a lot of investors in the SRI universe became scared of the stock market and sold their shares just as other investors did."

 

 

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Investing - Socially Conscious Investing Picks up Steam

(c) 2009 Andrew Leckey