IT AIN'T EASY being green — or Catholic, or alcohol- and tobacco-free.
Over the last year (through the end of August), the average equity fund that employs some sort of "socially responsible investing" (SRI) strategy has gained 6.68%, well behind the 9.71% average for all equity funds, according to investment-research firm Lipper. The gap is also there over five years: 4.42% annualized for SRI equity vs. 7.14% annualized for all-equity funds.
Though criteria vary, SRI funds generally avoid sectors that go against certain ethical guidelines. The biggies are alcohol, tobacco, defense, pornography and gambling, but a fund based on Catholic principles might also avoid drug makers, health insurers and hospital operators with ties to abortion.
It's a romantic notion, investing with a conscience. But the cold, hard truth is that those who mix morals and money are probably going to pay for it.
That said, there are enough SRI funds — 165 at last count — that you could build a respectable portfolio that conformed to your particular moral standing. And if you've already signed up God as your investment advisor, who are we to tell you to look elsewhere?
"To some investors, to be able to properly diversify and obey religious beliefs, that decline in returns is nothing," says Tom Roseen, a Lipper senior research analyst. Amen.
The top performer on our list this week, Winslow Green Growth fund (WGGFX: 21.97, -0.07, -0.3%), invests in a mix of "green" companies and "clean" companies. Essentially, the green companies are solving environmental problems, like how to sell renewable energy, and the clean companies are doing their best to not make our environmental problems worse.
The fund maintains a concentrated portfolio of small-cap and midcap stocks (42 holdings as of the end of last quarter), including Zoltek (ZOLT: 37.60, -0.40, -1.1%), a carbon-fiber manufacturer that has soared almost 200% this year. (Fun parlor game: Scan through the list of Green Growth's holdings and count the companies whose names alone probably qualified them for the eco-friendly fund. Hello, Herbalife (HLF: 39.94, -0.22, -0.6%)!)
Unfortunately, the greenies are struggling to keep momentum in these oil-drenched, military-might days. The fund has lost more than 7% over the last months. Whether that scares away new investors remains to be seen. Over the last year-and-a-half, the fund hasn't scared anyone; total net assets grew sixfold.
As a group, SRI funds account for a relatively meager 0.5% of all fund assets. Still, according to Lipper's Roseen, it's a segment of the fund world that isn't going anywhere.
"When we look at SRI, even during the real downtimes, the money flowing in has been fairly steady," Roseen says. "So people really stuck to their guns — maybe that's the wrong word — they stuck to their knitting."
We would caution that social responsibility has nothing to do with investing blindly in a lousy fund who's heart may be in the right place. So, if you must invest responsibly, choose carefully. The list below is a good place to start.
The Criteria This week, we asked Lipper for a list of all of the equity and mixed-asset funds with the socially responsible investing tag. From there, we filtered out those funds whose five-year returns did not rank in the top 50% of their respective classification. We also eliminated load funds and those whose expense ratios were higher than at least half their peers. Finally, each of the eight funds on our list is open to new investors, accepts minimum initial investments of $5,000 or less, and holds at least $50 million in total net assets.