Socially Conscious Investing Is Due for a Shift

Socially responsible investors are finding themselves at a crossroads in the wake of the recent dramatic move toward open elections in South Africa.

As South Africa quickly moves along the road toward majority rule, these investors are dropping their boycott of American corporations with operations in the country.

Some mutual funds are even considering direct investments in South African firms in an effort to advance economic development and boost employment in the isolated nation.

This shift promises to push the ethical investing movement in a new direction and could broaden its appeal, as less controversial issues gain prominence.

“South Africa has always been a divisive issue,” said Patrick McVeigh, a senior vice president at Franklin Research & Management, a Boston-based investment firm not connected with the giant Franklin Group of Funds in San Mateo, Calif. “It has been associated with too much negativity,” he said.

With ethical investors no longer boycotting American firms operating in South Africa, more people will jump on the socially responsible bandwagon, McVeigh predicts. A big push could come from brokerages that until now didn’t want to anger large corporate clients with business ties to the country, he said.

Any move to broaden the appeal of socially responsible investing would be welcome news to the roughly two dozen mutual funds that market themselves as socially responsible. All told, these funds have attracted only $3 billion in assets--a drop in the bucket in the nearly $2-trillion mutual fund industry.

Yet advocates say their approach doesn’t require investors to settle for below-average returns. For example, the Domini Social Index 400, which tracks the performance of 400 large U.S. stocks that pass certain ethical-investing tests, appreciated 70% from its inception on May 1, 1990, through Oct. 31 of this year. That compares with 58% for the Standard & Poor’s 500 index. However, there are few standout performers among the mutual funds, nor are there many such portfolios to choose from, especially for no-load enthusiasts.

Among ethical investors, the issue that now outweighs South Africa is the environment, a much less controversial topic.

“The environment is by far the key issue today,” said Steven J. Schueth, a vice president at the Calvert Group, a Bethesda, Md., firm offering seven socially responsible mutual funds with $1.4 billion in assets. “But it’s also a far more complicated issue,” he said.

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The problem is that environmental degradation is somewhat in the eye of the beholder. It may be easy to spot a corporate villain that spills crude oil in an Alaska bay, but it’s harder to pass judgment on firms that, say, make products that don’t recycle well.

As a case in point, even silk ties and blouses can be damaging to the environment when discarded in landfills, because zinc is added to change the pliability of these products, said Paul Hawken, author of “The Ecology of Commerce” ($22; Harper Business).

A second area gaining more prominence among socially responsible funds is that dealing with management-labor relations. This issue pertains to how companies treat their employees on issues ranging from the availability of child care to discrimination against women and minorities. “It’s not a union, non-union thing,” says Schueth. “It’s about companies that consider workers as assets rather than costs.”

In addition, many socially responsible funds will continue to avoid a variety of other companies, such as those that make tobacco products, liquor or armaments.

While apartheid is losing prominence as a major ethical-investing concern, the issue won’t disappear. U.S. and especially foreign companies will still have to be monitored in terms of their employment practices in South Africa, said Leon H. Sullivan, a Baptist minister from Philadelphia. As General Motors’ first black director, Sullivan drew up a set of guidelines that became the centerpiece for shareholder resolutions and divestiture policies regarding South Africa.

Speaking at a Social Investment Forum conference in Phoenix in early December, Sullivan urged the end to economic and investment sanctions in the country, with the proviso that U.S. and foreign companies follow equal-employment practices.

“It’s time to look for new, positive ways to encourage responsible corporate efforts in South Africa and to reward companies for doing good rather than criticizing every step of the way,” he said.

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Massachusetts Financial Services says it will close its MFS Emerging Growth Fund to new investors as of Jan. 14.

The small-company portfolio, based in Boston, has roughly $1 billion in assets.

Conversely, the Linder Dividend Fund of St. Louis has been open now for more than a month. The income portfolio had been turning away new investors for most of 1993, while it digested a cash influx that pushed its assets above $1.3 billion.

Making Money, Doing Good

Investors who consider themselves socially responsible shun what they see as the worst corporate offenders, such as companies with poor records on the environment or employee relations, as well as those that make tobacco products, liquor, armaments and the like.

Despite this moral appeal, the concept has been slow to catch on in the mutual fund arena, with only a couple dozen such portfolios available--mostly with average track records. The following funds are the only ones rated neutral or better by Morningstar Inc. of Chicago.

Max. sales Moringstar Fund Type load Phone rating Calvert-Ariel Growth Appreciation stock 4.75% 800-368-2748 Neutral Corporate Calvert Income bond 4.75% 800-368-2748 Neutral Calvert Social Corporate Invest. Bond bond 4.75% 800-368-2748 Neutral Calvert Tax-Free Municipal Limited Term bond 2% 800-368-2748 Highest Calvert Govt. U.S. Government bond 4.75% 800-368-2748 Neutral Dreyfus Growth Third Century stock None 800-645-6561 Neutral New Natural Alternatives resources 4.75% 516-466-0808 Neutral Growth Parnassus stock 3.5% 800-999-3505 Neutral Pax World Balanced None 800-767-1729 Neutral

Note: Morningstar’s rating measures a fund’s historic risk/reward ratio relative to others in its class. Funds with fewer than three years of investment results are not rated. “Neutral” is equivalent to a rating of three stars, “above-average” is four stars and “highest” is five stars.