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Socially responsible funds expand

As stock prices were tumbling through the worst bear market in a generation, socially responsible investing continued a steady gain in popularity, according to a new study.
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As stock prices were tumbling through the worst bear market in a generation, socially responsible investing continued a steady gain in popularity, according to a study released this week.

By the end of 2002, $162 billion was invested in mutual funds that screen for one or more non-financial criteria, up 19 percent from two years earlier, according to a biennial study from the Social Investment Forum, a trade group. During the same two-year period total investments in mutual funds, excluding money market funds, fell more than 19 percent.

Socially responsible funds still represent only a tiny 3.9 percent of the total $4.1 trillion invested in stock and bond mutual funds. But when the impact of large institutional investors is included, socially responsible investing has moved far closer to the mainstream.

Many giant pension and trust funds that are run for the benefit of teachers, government workers, unions, religious institutions and foundations now routinely use social criteria to guide their investment decisions. All told, some $2.18 trillion in assets under professional management falls under the rubric of socially responsible investing, or about 11 percent of the nation’s total $19.2 trillion in managed money, according to the study.

Tim Smith, president of the Social Investment Forum, said the corporate scandals of the past two years appear to have heightened interest in socially responsible mutual funds. Last year, he said, socially responsible mutual funds saw net inflows of $1.5 billion, while U.S. diversified equity funds posted outflows of nearly $10.5 billion.

“Our instinct is that many investors thought the socially responsible funds were going the extra mile on basic corporate governance issues,” he said. “We’re very confident interest will continue to grow in this area.”

The widening investigation into improper trading at mutual funds also could prompt some investors to take a fresh look at social investing because of the perception that socially responsible funds “walk their talk,” Smith said. But he cautioned investors against making any assumptions.

“My feeling is that every concerned investor should be asking every mutual fund they are participating in ... to explain what their policies are to make sure these scandals are not occurring in their house,” he said in an interview.

Reggie Stanley, senior vice president of Calvert Group, which follows social criteria in managing its $9 billion in assets, said the latest report shows that socially responsible investors tend to be loyal, long-term investors, who are “in it for the long haul.”

“What we’re seeing it that the social investor is a committed investor,” he said. “They are staying loyal to their funds at a time when the overall investor is not.”

Proponents of these funds say there is no real conflict between performance and socially responsible investing. Morningstar, an independent research agency, gives more than 40 percent of socially responsible funds its highest rating of 4 or 5 stars, compared with 32.5 percent for the overall universes of mutual funds.

“Social investing holds its own,” said Alisa Gravitz, vice president of the Social Investment Forum. “We go toe to toe in both bull and bear markets.”

Socially responsible investing began to gain critical mass in the 1980s, when the divestiture movement by shareholder groups helped pressure South Africa to end its system of racial apartheid. The movement gained a huge boost in 1998, when a Labor Department letter made clear that socially screened funds could be included in qualified retirement plans. The ruling coincided with a growing movement among public retirement funds to avoid tobacco company stocks. Over the past six years assets in socially screened accounts have grown from $433 billion to nearly $2 trillion.

By far the securities most commonly avoided by socially oriented portfolios are those issued by companies in the tobacco or alcoholic beverage industries. Other commonly used screens involve company labor relations, the environment, gambling and weapons manufacturing or defense contracting.

Some social investors also actively seek out companies that demonstrate outstanding performance in such non-financial areas as labor relations or environmental practices.

Of the 200 mutual funds that screen for social criteria, the biggest is American Funds Washington Mutual Investors Fund, with $47 billion in assets as of the end of last year. The fund “may not invest in companies that derive their primary revenues from alcohol or tobacco,” according to the prospectus.