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Course 304
SRI Funds

Introduction

No politics. No religion. We're taught to avoid delicate subjects at the dining room table.

There's no longer any need to avoid these issues when it comes to investing, though. Now, investors can adhere to their values using socially responsible funds. Very broadly, socially responsible investing (SRI) weaves values-based, nonfinancial criteria into the investment process.

But that definition is pretty broad. The SRI label can apply to various, even complex, investing strategies. However, despite the complexity, there are really just five basic questions you need to answer when looking for an SRI fund.

Despite the complexity, though, there are really just five basic questions you need to answer when looking for an SRI fund.

What Issues Are Most Important to Me?

Before getting bogged down in reams of information about different SRI funds, examine your own values. Which issues are driving you to become a socially conscious investor? Do you simply want to avoid investing in alcohol and tobacco stocks? Are you especially concerned about the environment? Are issues of workplace diversity critical to you? Do you want to avoid weapons makers?

Once you've identified the issues that mean the most to you, decide if you'd like a religious or a secular fund. The largest and best-known SRI funds, such as Pax World Balanced (PAXWX), TIAA-CREF Social Choice Equity (TISCX), and the Calvert funds, are secular funds. They usually avoid weapons makers and nuclear-power, alcohol, and tobacco firms. In addition, many secular SRI funds look for those companies with the best environmental, human-rights, and workplace-diversity records.

A growing number of religious offerings cater to an assortment of denominations. The Praxis funds are designed for Mennonite investors; the Ave Maria and Aquinas funds serve Catholics; the Amana funds were created for Islamic investors; and the Timothy funds serve conservative Christians. The majority of religious funds avoid alcohol, gambling, and pornography stocks, but their screens vary widely in other ways. For example, because of an Islamic principle against usury (interest), the Amana funds don't invest in bonds or many financial stocks.

How Does a Fund Screen Its Investments?

Once you decide which screens are most important to you, it's time to find the closest match. You might start by looking at Web sites that provide details on socially responsible investing. The most complete Web site of how SRI funds screen companies is the Social Investment Forum.

Accurate information about a fund family's screening efforts is also often available on the firm's Web site. Moreover, prospectuses and annual reports carry basic information about the types of social screens that the funds use. SRI customer-service representatives should also be able to answer your questions. Finally, examine a recent portfolio of any SRI fund you're seriously considering. Sure, a fund may say it uses environmental screens, but are those screens stringent enough for you? For example, Neuberger Berman Socially Responsive NBSRX takes a relative approach to screening. That is, the managers look for the companies in each industry with the best workplace and environmental records. That means, however, that the fund owns oil-exploration company Newfield Exploration (NFX). Investors seeking stellar environmental records may not be that comfortable owning even the most socially responsible oil-exploration firm.

Is This Fund Involved in Shareholder Activism and Community Investment?

No corporation will clear all socially responsible hurdles. A company may have an excellent environmental record, but it may not provide the best working environment for its minority employees. If SRI funds demanded perfection from every company they owned, they would never buy anything.

Thus, some fund families, including Domini and Calvert, use shareholder activism to challenge the policies of some of those companies they do own. Because shareholders own the company, they can push for it to change. Other times, funds simply engage the firm in a discussion, quietly pressuring the company to make alterations to the policies it considers unpalatable. To find out if a fund you're considering engages in shareholder activism, visit its Web site or call the company itself.

Is This a Good Investment?

Just because you want to invest with your heart doesn't mean you should risk losing your shirt. SRI funds can perform just as well or even better than their non-socially screened peers. (For example,e Amana Trust Growth (AMAGX) ranks No. 1 and 2 in its fund category over the trailing 10- and 15-year periods through April 2011.) But there are some poorly performing SRI funds out there, and you should avoid those as you would any bad fund.

Also, find out how expensive the fund is. You'll probably have to pay more for your socially screened funds. That's because such funds are typically smaller than their nonscreened peers and smaller funds tend to have higher expenses. Higher expenses may also reflect the additional research required to determine whether or not a company passes the fund's social screens.

How Do These Funds Work in My Portfolio?

Do you want an entire portfolio of funds that match your values, or are you comfortable with just one or two SRI offerings? There are socially responsible funds available in all major asset classes, although they're not equal in quality or quantity. SRI funds focusing on U.S. companies are the most plentiful. However, there are fewer SRI bond and international funds.

If you can't find enough suitable funds to build an all-SRI portfolio, you might simply choose one SRI fund to serve as a good large-cap core holding. After all, the largest companies are likely to have the biggest impact on the issues you care about, so why not focus on the big guys? There are a number of respectable large-cap funds available to socially conscious investors, including Domini Social Equity, Pax World Balanced, and Amana Income (AMANX).

Quiz 304
There is only one correct answer to each question.

1 Socially responsible funds:
a. All buy stocks of companies that provide domestic-partner benefits.
b. All avoid stocks of companies with poor human-rights records.
c. May screen companies on different values; there's no one SRI approach.
2 An SRI fund:
a. Would never own an oil company.
b. Might own an oil company.
c. Would always own an oil company.
3 Shareholder activism is a key for:
a. Some SRI funds.
b. All SRI funds.
c. No SRI funds.
4 The average SRI fund's costs are:
a. About the same as the average non-SRI fund's.
b. Less than the average non-SRI fund's.
c. More than the average non-SRI fund's.
5 Which statement is false?
a. It's easy to build a well-diversified, high-quality portfolio made up only of SRI funds.
b. There aren't as many good SRI bond or international funds as there are good SRI funds investing in U.S. stocks.
c. SRI funds can use dramatically different criteria.
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