Post on 21-Aug-2018
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Helping Clients Select SRI MutualFunds and Firmsby Natalie Chieffe. DBA, CFR\ and Karen Eifers Lahey. Ph.D.
Natalie Chie/fc, DBA. Cf P*, is an associate professor of
finance at Ohio t/niversit)i in Athens, Ohio. She is the
director of the universily's CFP registered program and
advisor for the Student ¡nvestment Group. Her research
interests lend loward investments and retirement.
Karen Filers Lahey, Ph.D,. is the Charle.'! Herberich
Professor o/Real Eslale al (he university of Akron in
Aferon. Ohio. She is co-direcWr of the CFP undergraduate
education program. Her current research areas are on
public pensions and retirement.
M any clients are interested in
buying shares in firms they
helieve are socially responsible,
based on their personal criteria. These
investments often take place through mutual
funds, but it can be difficult to accurately
classify "socially re.sponsible" funds and
determine how they differ from each other.
Do these funds support the same causes?
Should clients assume that all mutual funds
use the same definition of social responsibil-
ity? Furthermore, most investors would not
consider investing in socially responsible
investing (SRI) mutual funds unless their
returns were "at least equal to" conventional
mutual funds. Is it possible for SRI funds to
meet these expected returns with a limited
set of stocks from which to choose?
The purpose of this study is to provide
financial planners and their clients with an
explanation of the definitions, strategies,
screening criteria, and largest investments of
mutual funds that self-identify as providing
socially responsible investment opportunities.
The paper also examines the performance
Executive Summary
This study examines research onsocially responsible investing mutualfunds that includes definitions, strate-gies, and performance as a backgroundfor understanding the concept and itsinvestment applications.The definitionof SRI is a function of the individual'sor funds' viewpoint and the specific cri-teria they are willing to adopt.There isno generally accepted definition,Major strategies for SRI are screeningof stocks, shareholder advocacy, andcommunity investing.Advisors can choose from four differ-ent SRI indexes for use as benchmarks,but the indexes overlap significantly inthe firms included in the indexes, soadvisors must choose carefully.Most previous studies have found nostatistically significant differencebetween the risk-adjusted returns of
and criteria of 78 SRI funds. The picture
that emerges is one that illustrates the
complexities of choosing an appropriate
SRI mutual fund or firm that matches a
specific client's criteria.
I
History Of SRI
We examine three categories of SRI
research: definitions, strategies, and per-
SRI mutual funds when comparedthe returns of conventional funds, andour results support this finding. SRIinvestors are not sacrificing returns.The average annual return for the 78SRI ftjnds selected for this study is 4.8percent, while the return on the S&P5CX) is 2.95 percent and the return onthe Domini Social 400 Index is 2.0 per-cent For the sample period of 2001 to2006. the risk-adjusted return (RAR) onthe mutual funds is 37.3 percent theS&P 500 IS 21.2 pencent and theDomini Social 400 Index is 14.0 percentWe report the overall retums for 11 indi-vidual screens used to identify specific typesof socially responsible investing. Rnancialpla^ners can detennine which funds maybe most appnopriate for their clients basedon the specific crrtena discussed and theresults provided in this study
formance. Within the strategies category,
three additional subcategories can he identi-
fied as (1) screening, (2) shareholder advo-
cacy, and (3) community investment.
Malkiel and Quandt (1971) identified the
basic issues that were generally discus,sed
before the nomenclature of socially respon-
sible investing was developed as a specific
approach to selecting investments. They
wrote an article in the Harvard Business
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C H I E F F E L A H E Ï Contributions
Review just before the first SRI mutualfund was introduced and they framed theissues from the perspective of universityendowment funds. They stated that the pri-mary objective of a university must he aca-demic freedom, which requires that itremain neutral on investment policies andthat it is fiscally irresponsible for anendowment fund manager to accept lowerinvestment returns in an attempt toachieve social goals.
The paper is particularly interestingbecause it anticipated many of the issuesdiscussed in current articles on sociallyresponsible investing. Investors that maybe under pressure to invest based on socialgoals, according to Malkiel and Quandt,include pension fund managers, financialinstitutions, universities, churches, andcharitable organizations. They proposedthe following questions;
• Are there companies whose securitiesshould not be held in the portfolio forsocial, political, or moral reasons?
• Should the portfolio manager beguided by such considerations invoting his or her institution's stock?
• Should an investing institutionemploy any of its resources in a posi-tive manner for the sake of social,political, or moral ohjectives? (p. 38)
The first SRI mutual fund was launchedon August 10,1971, as Pax World Fund,'with $101,000 in assets. Two Methodistministers. Jack Corbett and Luther Tyson,said they had two motivations for startingthe fund: (1) provide a Rind that allows indi-viduals to invest in firms that share theirvalues, and (2) set specific standards of envi-ronmental and social responsibility that cor-porations should be challenged to live up toin their business operations. This fund isnow known as the Pax World BalancedFund. Its Web site states that it is the firstfund "to use social as well as financial crite-ria in its investment decision."
Today, an SRI industry organizationknown as the Social Investment Forum(vw^iw.socialinvest.org) states that it is a"national nonprofit membership organiza-tion promoting the concept, practice, and
growth of socially responsible investing"(2007). Its Web site indicates that from1995 to 2007 the number of SRI fundsincreased from 55 to 260, and SRI assetsgrew from $639 billion to $2.71 trillion. Inthe 36-year period from the funding of thefirst SRI fund with $101,000 to today, itwould appear that this criterion for select-ing investments has wide appeal. We nowturn our attention to SRI criteria, startingwith the effort to define SRI.
Definitions of Socialiy Responsible investing
Socially responsible investing can bedefined in a variety of ways, depending onthe viewpoint of the author. Henningsen(2002) defines SRI as investing hased on(1) choosing companies that reflectinvestors' values, (2) bringing pressure onfirms that they invest in by engaging inshareholder activism, and (3) investing inprojects that target community develop-ment initiatives. Hill, Stephens, and Smith(2003) state that investors use sociallyresponsible investing to apply their beliefsand values to firms they think use thesecharacteristics in operating their business.
In a project undertaken by the NaturalCapital Institute to describe the currentstate of socially responsible investing,Hawken (2004) identifies and examinesSRI retail funds with equity holdings. Hefinds that over 90 percent of Fortune 500firms are selected for inclusion in SRImutual fund portfolios, providing a verywide definition of the term. SRI fundspromise that an individual inve.stor'smoney will not be used to buy firms thathave distasteful products or track recordsand that firms that display environmentalresponsihility, proper governance, andsocial justice will be selected. Hawkenstates that anyone can call a fund an SRIfund and take advantage of these criteria togain a marketing edge without holding aphilosophical viewpoint.
Gay and KJaassen (2005) state thatsocially responsihie investing as a concepthas evolved over time. Screening criteriaused by fund managers have become more
qualitative and include measures on work-place conditions and sustainable businessoperations. They define SRI as "investingin companies that meet certain baselinestandards of social and environmentalresponsibility; actively engaging thosecompanies to hecome better, more respon-sible corporate citizens; and dedicating aportion of assets to community economicdevelopment." According to Kurtz (2005),SRI is "a widely used but rather impreciseterm that implies unscreened portfolios areirresponsible." In Europe, SRI refers to sus-tainable investing or green investing. Kurtzconcludes that it is a function of yourmoral views and how you, as a fiduciary,think markets work, if you follow quantita-tive factors and optimize your portfolio toa benchmark, SRI will not be "too burden-some." If you focus on a small group ofstocks, you may be negatively affected.
Debates on the definition of sociallyresponsible investing can involve thosewho view SRI based on "faith in supernatu-ral forces and those who premise it onbeliefs in political ideologies and secularphilosophies," according to Statman(2005). He discusses SRI based on politicalideologies and secular philosophies, andthat there are similarities and differencesin the two vievqioints, Firms can be viewedon a continuum with no company beingperfectly socially irresponsible or perfectlysocially responsible. When analyzingmutual funds, they can either be lenient orstrict in their criteria for SRI; but to suc-cessfully attract investors they must appealto a large and loyal enough group ofinvestors and be aware of competitionfrom other funds in terms of performanceand tracking errors.
The Social Investment Forum providesdata on funds that use SRI screens and pro-vides analysis of their performance. It definesSRI as the "process that considers the socialand environmental consequences of invest-ments, both positive and negative, within thecontext of rigorous financial analysis." Basedon the research reviewed here, it appears thatthere is no one generally accepted definitionof socially responsible investing. Rather it
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Contributions C N I E F F E I L A H E Ï
Table 1: SRI Screens
1. Alcohol: Companies that profit from alcohol.
2. Tobacco: Companies that derive significant revenue from tobacco products.
3. Gambling: Companies that derive significant revenue from gambling enterprises.
4. Defensive weapons: Companies whose primary source of revenue is derived fromthe manufacture of weapons-related products or from defense contracts. Somefunds exclude investments in U.S. Treasury securities.
5. Animal testing: Companies that conduct unnecessary animal testing for personalcare products. Some recognize that medical products are required to undergoanimal testing in compliance with the FDA.
6. Products/services: Companies in Pharmaceuticals, biotechnology, medicaldiagnostic services, and products. Seek companies that provide eco-friendlyproducts, green technology, and organic/natural foods. Evaluate companiesbased on consumer protection and product purity. No investment in abortion,pornography, or related products.
7. Environment: Seek companies that protect and improve the environment and usenatural resources properly. Exclude major electric utilities and companies whoseprimary source of revenue is derived from nuclear generation. Avoid or limitcompanies engaged in the genetic modification of plants and animals or in theextraction of natural resources.
8. Human rights: Do not invest in companies with negative economic impact ondisadvantaged communities. Favor companies with best practices, and mayfocus on women's issues-
9. Labor relations: Seek companies not involved in sweatshop operations, forcedlabor, discrimination, unfair or unsafe labor practices, or Maquiladora operations(Mexican assembly plants that manufacture goods for export, generally ownedby non-Mexican corporations).
10. Employment/equity: Seek companies offering equal employment opportunities,with fair wages, and with safe working conditions. May choose to invest incompanies with women in management positions and strong benefits.
n. Community investments: Seek companies that direct capital to communitiesunderserved by traditional financial services, making it possible for localorganizations to provide financial services to low-income individuals andcapital for small businesses.
depends on the viewpoint of the individ-ual, the firm, or the institutional investor.
Three Key Strategies
The Social Investment Forum states thatsocial investing includes three key strategiesof screening, shareholder advocaq ,̂ andcommunity investments. It provides thefollowing definitions of the key strategies:
• Screening is the practice of evaluatinginvestment portfolios based on social,environmental, and good governancecriteria.
• Shareholder advocacy involvessocially responsihle investors who takean active role as the owners of corpo-rate America.
• Community investments direct capitalfrom investors and lenders to communi-ties that are underserved hy traditionalfinancial services institutions.
Screening
SRI mutual funds typically use screening astheir main strategy. Tahle 1 provides adescription of 11 SRI screens used hy indi-viduals and mutual funds to either includeor exclude a firm from an investment port-folio. The definitions represent our interpre-tation of these screens based on a variety ofsources including the Social InvestmentForum and individual fund prospectuses.The first three screens of alcohol, tobacco,and gambling are usually referred to as "sin
screens" from their history as early as the1800s, when churches avoided investmentin them (Henningsen 2002). Screen #6 isfor or against certain products and services.This screen is most often promoted by vari-ous religious groups.
According to Statman (2005), today'sSRI movement started in the 1960s whenthe country was in turmoil over the Viet-nam War and dealing with struggles overcivil rights, women's rights, and environ-mental policies. This led to screens foranimal testing, products and services, andthe environment. Today, different screenshave become prominent with the collapseof Enron and other issues of corporategovernance such as executive pay; laborrelations; employment; equal rightsopportunities by race, gender, and sexualpreferences; fair wages; and safe workingenvironments. Human rights, labor relations,employment/equity, and communityinvestment round out the 11 screens.
A strong correlation between corporatereputation (as defined by Fortune's list ofmost admired firms) and SRI data on cor-porate social responsibility is found byWaddock and Graves (1997). They stateihat perception of the quality of manage-ment is related to performance but not toenvironmental ratings. Russo and Fouts(1997) find tbat the environmental ratingsof the firms have a significant impact ontheir return on assets. Bello (2005) differsfrom other studies because be explicitlyanalyzes the relationship between ethicalscreening on portfolio diversification andthe variable effect of diversification oninvestment performance. He states that"not a single characteristic of sociallyresponsible mutual funds is significantlydifferent from that of conventional funds."
Statman (2006) provides a description offour different socially responsihle indexes usedas benchmarks for determining the perform-ance of SRI investments. The four indexes are(1) Domini 400 Social Index (DS400), (2) theCalvert Social Index (Calvert Index), (3) theCitizens Index, and (4) tbe U.S. portion of theDow Jones Sustainability Index (DJSI). Hefinds that the four indexes have a positive
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Contributions C i i i [ F F E I L A H E Y
correlation of greater than 90 percent, butthat they have a substantial tracking error(deviation from a bencKmark). Additionally,there is much overlap in the firms that areIncluded in each index.
The DS4Ü0 Index is produced by KLDResearch and Analysis, Inc. and excludesfirms that derive any revenue from manu-facturing alcoholic or tobacco products,gambling products or services, electric util-ities that own parts of nuclear powerplants, and firms that generate more than2 percent of sales from the production ofmilitary weapons. The index also excludesfirms that have a negative record on envi-ronment, diversity, and employee relations.
The Calvert Index excludes firms thatprofit from gambling, tobacco, and militaryweapons, but it includes firms that producealcohol, firearms, and nuclear power. Itscreens firms based on their performanceon workplace, product safety, internationalhuman rights, community relations, indige-nous people's rights, and the environment.
Citizens Index seeks firms with positiverecords on screens that include corporategovernance, human rights, diversity, envi-ronment, employee relations, and animaltesting. It excludes firms that have any inter-ests in tobacco or alcohol, lack diversity,produce power firom nuclear plants, or havea material interest in weapons or gambling.
DJSI, the fourth index, uses a differentapproach from the other three. It focuseson best-in-class selection rules that pickthe best firms in each industry in variousscreening categories.
It appears that there is significant over-lap in these four indexes as well as the vari-ous screens that have been discussed thusfar. This makes it important for financialplanners and their clients to carefiillyselect an appropriate index to use in com-paring the performance of a particular SRImutual fund performance.
Jennings and Martin (2006) suggestanother approach to the social indexing offunds. They propose using factor-basedmodels and commercial screening data toselect SRI firms to form individualizedportfolios. They discuss the problems
involved in screening individual firms andselecting funds that provide SRI because ofhigh expenses, tracking errors, and incom-plete screens.
Sharehoider Advocacy
The second strategy for those interested insocially responsible investing is share-holder advocacy. The only requirement forfiling a shareholder resolution is to own$2,000 worth of a company's stock and tohold it for at least a year. Hundreds ofthese shareholder resolutions are filed eachyear in an effort to change corporatebehavior, and they are put to a vote of allshareholders at the annual meeting. Suc-cess is measured by having three percentor more of stockholders vote for the resolu-tion based on the fact that it allows thestockholder to file another resolution onthe topic the following year.
Barber (2006) examines the use ofshareholder advocacy by state pensionfunds. He reviews the shareholder activismprograms of CalPERS, the CaliforniaEmployees' Retirement System. Since1992, the pension fund has published anannual list of companies it thinks have cur-able governance shortcomings, and Barberfinds that the day the list is announcedthere is an increase of $3.1 billion in share-holder wealth.
Community Investment
A third strategy for social investing is com-munity investment. It involves community-based financial institutions (banks, creditunions, and loan funds) that make loanssupporting local development in theUnited States and developing countries.The Community Reinvestment Act directsbanks to set aside a portion of their lendingfor small-business development and low-income housing.
Performance
Many of the SRI studies focus on perform-ance from a variety of viewpoints. We
select only a few to give a flavor of thistype of research. Hamilton, Jo, and Stat-man (1993) study 17 SRI funds and find nostatistically significant difference betweenthe risk-adjusted returns of socially respon-sible mutual funds and conventional funds.Statman (2000) analyzes the performanceof the DS400 Index and finds that it issomewhat riskier than the S&P 500 andoutperforms the S&P 500 for the period1990-1998 in both raw returns and risk-adjusted returns. He also examines a list of31 socially conscious funds, selecting onlyfunds that have no more than 30 percentin bonds and cash as defined by Morn-ingstar. He finds that the mean expenseratio is 1.5 percent, and only nine fundswere established before 1990. When Stat-man compares these funds to a matchedsample of 62 conventional funds, there isno significant difference in performance orexpense ratios.
A survey sent to investors in Earth Sanc-tuaries Limited (ESL), an Australian firmthat conserves ecosystems and breedsendangered species, finds that investorsbuy shares in the firm because of its envi-ronmental mission rather than for finan-cial considerations. The authors of thestudy, Beal and Goyen (1998), concludethat not all investors are wealth maximiz-ers. Instead, these investors demand that a"psychic utility component be included intheir returns."
Crutchley, Hudson, and Jensen (1998)provide an examination of shareholderadvocacy by examining the CalPERSannouncement of target firms and forminga portfolio of those firms on the announce-ment date. Returns are time-period spe-cific, v/ith earlier periods having higherreturns than later periods. They suggestthat aggressive activism does increa.ieshareholder wealth. Preece and Filbeck(1999) examine the question of whetherfirms identified as family-friendly earn ahigher return than firms that are not soidentified; their results indicate that thereis no difference.
The majority of papers that examine theperformance of SRI activities indicate that
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C H I E F F E i L A H E Y Contributions
there is no difference in investor returnsbetween SRI firms and conventional firms.This suggests that individuals who choose toinvest in SRI firms or mutual funds are notsacrificing investment returns. Retirementplan fiduciaries will find such data of partic-ular interest. The U.S. Department of Laborrecently updated its guidance that planfiduciaries "may never increase expenses,sacrifice investment returns, or reduce thesecurity of plan benefits in order to promotelegislative, regulatory, or public policy goalsthat have no connection to the payment ofbenefits or plan administrative expense"(DOL 2008). If pension managers are inter-ested in SRI, they will have to prove thatthey can maximize returns and considersocially responsible factors.
Data and Results
To provide a more recent test of sociallyresponsible investing, we examined theperformance and criteria used by mutualfiinds that self-identify as providing SRIopportunities. The selection of SRI mutualfijnds started on the Social InvestmentForum Web page, which listed 93 memberfunds as of June 30, 2006. We augmentedthis list of funds with the premium versionof tbe Morningstar.com Web site that listed113 SRI fiinds. We combined the two listsand examined tbem for the date of origina-tion for each fund. We eliminated thosefunds with fewer than 60 months of pricehistory, resulting in 78 funds for tbesample dataset. The period examined is tbe60 months from April 2001 to March 2006and it allows for tbe production of 59 bold-ing period returns.
Table 2 illustrates tbe distribution offiinds based on tbree different choices foreach of the 11 screens: (1) no screen, indi-cating tbat funds do not use this screen forselecting companies; (2) screen for, indi-cating tbat funds select companies tbathave a positive record on tbis screen; and(3) screen against, indicating that funds donot select companies tbat have a negativerecord on this screen.
Funds that do not use a particular screen
Table 2: Distribution of SRI Fund Screens
Alcohol
Tobacco
Gambling
Defensive Weapons
Animal Testing
Products/Services
Environment
Human Rights
Labor Relations
Equality
Community Investments
No Screen
3i
n36
30
42
24
30
35
33
36
47
Screen For
0
0
0
0
0
40
35
34
40
38
28
Screen Against
4 /
67
42
48
36
14
13
9
5
4
3
Total Funds
/ o
78
78
78
78
78
78
78
78
78
78
1
No Screen: The fund does not screen for or against this area.Screen For The fund invests in companies with positive records in this area.Screen Against: The fund bans investment in companies v/ith poor records in this area.
are most likely to appear in tbe communityinvesting category and least likely toappear in the tobacco screen. Tbe smallnumber of funds tbat do not screen fortobacco may reflect its traditional role asone of tbe "sin screens," witb tbe other twobeing alcohol and gambling. The "screenfor" column has no funds in the first fivescreens, which is intuitively logical in thatthey represent negative factors for sociallyresponsible investors. In the "screen for"column, tbe most funds (40) are in theproducts/services and labor relationsscreens. Screens "against" are used in someareas by most of tbe funds. The largest"screen against," after tobacco, is defensiveweapons (48). Relatively few funds con-sider corporate responsibility screensinvolved witb products, environment,buman rights, labor relations, equality, andcommunity investing.
Tbe religion-based fiinds tend to screenagainst certain criteria such as pornogra-phy, abortion, gambling, and alcohol. Forexample, Islamic investing is based onIslamic ethics (Shari'ab), which prohibitmoney going into companies involved inalcohol or gambling, and companies thatmake profits from interest payments, suchas banks and insurance groups. Mennoniteand other Anabaptist investors avoid
nuclear energy stocks, defense contractors,and U.S. Treasury bonds tbat supportDefense Department spending. Membersof the American Jewish community investin projects tbat promote socially responsi-ble community development and sbare-holder activism. Catholics shun enterprisestbat support abortion or contraception orprovide domestic partner benefits forunmarried or gay couples. ConservativeChristians bave a wide variety of invest-ment choices that do about the same mod-erate screening as secular organizationsoffering socially responsible funds, butthey use the profits to support Christiancommunities and values. Other fundscatering to conservative Christians avoidinvestments in enterprises their clients dis-approve of.
Most funds screen for more than one cri-terion, with a possible explanation that theyare attempting to increase their attraction toa greater number of SRI investors.
We compare tbe returns on our set ofSRI funds to tbe Standard & Poor's 500(S&P 500) Index and to the DS400 SocialIndex. We choose the S&P 500 to representthe overall universe of stocks from whichinvestors may choose. The DS400 repre-sents the universe of socially responsiblestocks from wbich we assume the SRI fund
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Table 3: Average Returns and Risk-Adjusted Returns, 2001-2006
Coinpanies
Funds
Years
Average Return
Standard Deviation
Risk-Adjusted Return
Sample SRI Funds
78
5
4.8%
13.0%
Ki 37.3% . ^ H
S&P 500
50Û
5
2.95%
13.9%
21.2% . ^ i
DS400
400
5
2.0%
14.3%
^H.14.0%
Table 4: Annual Returns for Screens Used by SRI Mutual Funds,2001-2006
Screen None For
Alcohol
Tobacco
Gambling
Animal Testing
Defensive Weapons
Products/Services
Environment
Human Rights
Labor Relations
Equality
Returns
6.4%
3.2%
5.9%
5.5%
6.3%
6.6%
6.6%
6.1%
70%
6.4%
Return Returns
51.2% !
25.6%
48.2% !
50.2% !
48.5% !
52.1% !
54.1% !
50.1% !
56.8% !
53.0% !
46.5% !
Return
Community Investments 5.6%
Averages ^IB|RR^^^° 48.7% !Overall Average 4.6%
Overall Risk-AdjustedReturn 43.0%
' < -ireater than the average risk-adjusted return
3.7%
3.9%
3.6%
3.3%
3.4%
4.0%
3.7%
38.6%
372%
40.0%
379%
42.0%
45.7%
40.2%
Returns
4.0%
5.2%
4.1%
4.2%
4.1%
5,7%
3.9%
5.5%
4.4%
3.1%
3.4%
4-3%
Risk-Adjusted
Return |
416%
46.9% !
43.0% !
39.8%
43.4% !
53.4% !
47.6% !
47.6% !
30.9%
19,2%
25.6%
39.9% ¡
managers choose their holdings.
As shown in Table 3, for the sample period
the overall averc^e annual return for our
dataset of SRI funds is 4.8 percent, higher
than the 2.95 percent return on the S&P 500
Index and the 2 percent return on the DS400
Index. When risk-adjusted returns (RAR) are
calculated, the SRI funds have not taken on
an undue amount of risk. The overall risk-
adjusted return on the sample set is 37.3 per-
cent, higher than the RAR of 21.2 percent on
the S&P 500 and the RAR of 14.0 percent on
the DS400 Index. The sample of SRI fimds
has higher annual and RAR retums than both
the S&P 500 and the DS400 Index. The dif-
ferences are economically significant but not
statistically significant.
The best and worst monthly RARs for the
individual funds during the sample period
range from 43.3 percent to -4.1 percent,
demonstrating tbat all SRI funds are not
equal. But as seen in Table 4, there are no
obvious differences in the way the best and
worst funds screen for SRI criteria. The
returns for the SRI mutual funds are based
on their stated screen selections, given the
choices shown in Table 2.
Table 4 lists the return for each screen
based on a fund stating that (1) it did not
screen for one of the 11 specific criteria, (2)
it selected firms because they displayed posi-
tive criteria, or (3) it eliminated them
because they displayed negative criteria. The
two types of returns reported are the average
annual return and the risk-adjusted return,
found by dividing the annual return by the
standard deviation of returns. When the
results are examined in this way, tbe sample
funds outperform the S&P 500 and the
DS400 Index. Out of 28 returns, 17 (60 per-
cent) have RARs that match or outperform
the overall sample RAR of 43 percent. Fur-
ther, in each of the screens, except tobacco
and products, the funds that do not screen
for that criterion earn higher RARs than
those with either a "for" or "against" screen.
The only "against" screens that outperform
the average are on tobacco, defense, prod-
ucts, environment, and human rights. All
categories outperform the DS400 Index for
this period and all but one outperform the
S&P 500.
For Table 5 (on page 68), we found the
top ten holdings for each fund as provided by
Morningstar, counted how many times each
firm appeared as a top-ten holding, and cal-
culated the percentage of mutual funds hold-
ing that company. Thirty-seven companies
were on the list, with 33 of them compo-
nents of the S&P 500. Two were not on the
S&P 500 list because they are not American
firms (BP and Canon). Thirty-three were
also Fortune 500 firms and two were smaller
and appeared in the Fortune 1000 list. Thir-
teen of the companies are components of tbe
Dow Jones Industrial Average. Thus, this list
does not look markedly different from what
one would find in many non-SRl mutual
funds. This is not a surprise; smaller compa-
nies may not have the resources to be as
socially responsible or they may simply not
have the resources to prove they are. In addi-
tion, more analysts follow larger companies,
making their social performance data more
readily available to fund managers.
Our last comparison appears in Table 6
(on page 70), which shows the top ten
performing firms when no screen is
applied and when a negative screen is
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Contributions C H I E F Í E I L A H E Y
Table 5: S&P 500 Companies Frequently Listed in Top TenHoldings by SRi Funds
I Most Often Foundin Top Ten Holdings
of SR] fund5
JP Morgan Chase & Co.
Bank of America
Procter & Gamble
Johnson & Johnson
Microsoft
AT&T
Citigroup
Exxon Mobil
Pepsi
Intel
Wells Fargo
Pfizer
Goldman Sachs Group
General Electric
Chevron
Home Depot
Hewlett-Packard
Emerson Electric
Conoco Phillips
Amgen Inc.
American International Group
Verizon Communications
Lehman Brothers Holdings
FedEx
Costco Wholesale Co.
Baker Hughes Inc.
Apache Corporation
Texas Instruments
Sysco
Merck
Intuit
Colgate Palmolive
UPS
applied. The lack of difference betweenthe two comparisons illustrates the diffi-culty in identifying SRI funds. While thenegative screen includes more funds, thesame firms appear in both criteria.
Number and Percentageof Times in Our 78
Fund Sample „
18
16
14
13
12
n10
10
10
9
8
7
7
7
7
6
5
5
5
5
5
5
5
4
4
4
4
4
4
3
3
3
3
3
, S.08%
20.51%
17.95%
16.67%
15.38%
14.10%
12.82%
12.82%
12.82%
11.54%
10.26%
8.97%
8.97%
8.97%
8.97%
7.69%
6.41%
6.41%
6.41%
6.41%
6.41%
6.41%
6.41%
5.13%
5.13%
5.13%
5.13%
5.13%
5.13%
3.85%
3.85%
3.85%
3.85%
3.85%
Rankingas Fortune
ppji-^OOFirm
tí 6
17
12
24
32
48
39
8
1
61
4 9
4 6
31
41
7
4
14
11
126
6
-
9
18
62
70
28
310
299
167
68
95
-
204
44
Conclusions
This study provides a guide for financial plan-
ners and their clients who are interested in
socially responsible mutual funds but are con-
fused by the multiple offerings. We examine
the research on SRI and divide it into the cate-
gories of definitions, strategies, and perform-
ance. There are multiple definitions of socially
responsible investing. This represents the
most difficult task in choosing a fund that will
match the specific desires of a client. It is
important to carefully identify the characteris-
tics the client wants and make sure tbe fund
or ñrm fits the criteria. Of the three com-
monly used SRI strategies, screening is the
predominant method of selection.
Our sample includes 78 SRI mutual funds.
We organize them by the 11 SRI screens we
have identified. We group the funds according
to their screens to determine which ones out-
perform the average for all screens, for the
S&P 500, and for the DS400. The highest risk-
adjusted returns are earned by funds that
screen specifically against firms that profit
from tobacco and certain products, and by
fiinds that refrain from screening for or
against in the areas of products, environment,
labor relations, and community investing.
However, none of the differences is statisti-
cally significant
In this study, we ask whether SRI funds are
all the same and whether they support the
same causes. We found that tiiey state their
purposes in several different ways, which
would lead investors to expect differences in
returns. The managers of these funds want to
outperform other funds. This leads them to
select the largest and strongest companies that
comply with their criteria, and tends to make
their universe of companies very similar.
The unique contribution of this study is its
explanation of the various definitions of SRI
and the confirmation ofthe lack of difference
in risk and return for SRI funds when com-
pared with non-SRI funds. The real difficulty
that financial planners and their clients face is
deciding which firms or funds match their
personal social screening criteria. Each client
should decide which of these areas they find
most important and then choose funds that
screen in those areas. Of course, the usual
caveats concerning mutual fund fees and
expenses apply.
m68 Journal of Financial Planning \ FEBI!IIABY2009 www.FPAjournal.org
Contributions C H I E F F E I L A H E Y
Table 6: Incidence of the Same Large Companies Appearing
AlcoholNo Screen
31 Funds
AT&T (3)
Bank of America (4)
Cisco (5)
Citigroup (5)
Exxon Mobile (6)
General Electric (5)
Johnson & Johnson (3)
Microsoft (4)
Pep5i C3)
Procters Gamble <4)
Negative Screen47 Funds
AT&T (7)
Bank of America (10)
BP(7)
Cisco (13)
Intel(7)
Johnson & Johnson (9)
JP Morgan Chase (14)
Microsoft (7)
Pepsi (6)
Procters Gamble (9)
îjng Different Screens
Tobacco a j ^ l
11 Funds
Bank of America (3)
Chevron (3)
Citigroup (2)
Exxon Mobile (3)
General Electric (2)
IBM (2)
Johnson & Johnson (2)
JP Morgan Chase (2)
Microsoft (2)
Procters Gamble (3)
67 Funds
ATST C9)
Bank of America (11)
Cisco (17)
Citigroup (8)
Exxon Mobile (7)
Johnson S Johnson (10)
JP Morgan Chase (14)
Microsoft (9)
Pepsi (7)
Procter S Gamble (10)
[WK Gambling
36 Funds
AT&T (5)
Bank of America (8)
Chevron (5)
Cisco (6)
Citigroup (8)
Emerson Electric (7)
Exxon Mobile (8)
General Electric (7)
Hewlett-Packard (4)
Microsoft (5)
in
J
42 Funds
AT&T (5)
Bank of America (6)
BP(6)
Cisco (12)
Intel (7)
Johnson & Johnson(9)
JP Morgan Chase (12)
Microsoft (6)
Pepsi (5)
Procter & Gamble (9)
Endnote
1. www.paxworld.com/02_history.html.
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