Conscience Is Her Guide

The Domini Social Equity Fund owns no shares of Philip Morris. Never has and most likely never will as long as Amy L. Domini continues to have her way.

Domini, 47, manages the fund, a no-load fund that follows an index of the same name. The index consists of larger companies with policies Domini and her staff regard as positive and that have no ties to tobacco, gambling or nuclear power, and whose businesses don’t involve heavy pollution. Index companies must meet criteria related to the environment, employee relations, diversity, community relations, product quality and safety.

The fund is for investors who want to make investment decisions based on ethical or moral standards.

In 1989, after nearly a decade as a retail broker, Domini set out to prove that contrary to the claims of naysayers, a universe of large-cap, socially screened stocks could produce returns on a par with the Standard & Poor’s 500 index of widely held large-company stocks. Her index of 400 stocks has outperformed the S&P; 500 for the last two years (although because of expenses, the fund trailed it slightly).

Although not much of a social activist in her younger years, Domini comes from a Boston family with a long history of civic-minded activities and concern for labor issues. Domini and her husband, Peter Kinder, wrote “Ethical Investing,” a guide to socially responsible investing, published in 1984.

Now in her sixth year of managing the fund, Domini, an avid gardener and mother of two boys, has led it to a four-star Morningstar rating. Morningstar analysts call the Cambridge, Mass.-based fund “a worthy choice” for investors looking for a socially screened fund that has performed well. She talked with staff writer Debora Vrana.

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Times: Is there truly such a thing as an ethical company?

Domini: No. I think there are model companies that come as close as you can come. Coca-Cola [got into business] to deliver drinks to the public and make money doing it. If you think of delivering soft drinks as one circle and making money as another circle, there are places where the two intersect.

The goal of socially responsible investing is to become an important enough voice to make a difference in where those circles intersect. They intersect on issues of corporate compensation and community. When the voice of financial markets becomes dominant over those of other societal parties, we lose the right to demand much of our companies. But, on the other hand, if we get into trying to make companies good or ethical, I’m concerned that socially responsible investing would become eco-fundamentalism.

Times: How do you select companies for your Domini index?

Domini: We modeled our index on the S&P; 500 in terms of how to reflect a market. We try to reflect the average or typical socially responsible investor. It is not a list of the 400 best socially responsible companies in America; it is a list that reflects broad market behavior.

First, we took the S&P; 500 and then excluded companies with ties to alcohol, tobacco, gaming, weapons making or nuclear power. Then we applied what people generally think of as positive screens, the charitable giving and diversity. Then we stood back and said, “Philosophically, does this feel right?” We also tried to add in companies that would better capture broad market behavior. We lost automobiles as an industry, because they are all in military. So we then added auto parts, which we believe might behave like autos if there was a rally. We won’t knock companies out unless there is a merger or a bankruptcy or they cross the line socially. The S&P; [index] has a 6% turnover, and we have about the same.

Times: Does the fund simply buy and hold socially conscious stocks?

Domini: It’s a true index fund. We replicate our index 100%. That’s something philosophically that I’m determined to do. It’s also something, in all candor, that has been tough to do in this market rally. But we own every one of these companies in the index, and we’re in constant discussions with them.

Times: Most investors think socially responsible investing will only yield lackluster returns.

Domini: There’s a perception out there that “index fund” means average returns, but in fact it’s been one of the top performers in recent years. Same with socially responsible investing. There’s a presumption that every kind of limitation or bias [like a social screen] will negatively impact the portfolio. We are introducing biases and sometimes they hurt us; they did in 1993. But we think over the long haul, strong corporate culture and forward-looking management will mean higher returns.

Times: There were some early problems with the Domini fund, such as low assets and excess cash reserves. Have you resolved those?

Domini: Yes. We’ve been maintaining cash at under 1% of the portfolio. We’ve had new cash inflow from investors into the fund every day but one since we started. So getting cash in overnight still has a negative impact--but we have been very aggressive about keeping cash down. On the assets, before you have at least $30 million, it’s hard to hold all the stocks in an index. Now that we have $130 million, it’s totally taken care of.

Times: The expenses on your fund are higher than for the average mutual fund. Why?

Domini: Our expenses are currently 0.98%. That’s low for the socially responsible industry but high for an index fund. But that’s because we do have extra costs; we have to keep a five-person research staff. I am willing to go out on a limb here, though, and say that those expenses will come down as assets grow.

I guess one other thorn is that the S&P; [index funds] have the ability to buy futures and we don’t. [S&P; 500 index funds can buy the market quickly and at low cost via futures and options.] If I were to buy the S&P; futures, it wouldn’t meet our socially responsible criteria. I’d love to have a Domini Future out there, but we haven’t reached that happy day yet.

Times: What stocks are you most heavily weighted in right now?

Domini: Almost 5% of the portfolio is Coca-Cola. Our top 10 companies are 27% of our weighting. They include Intel, Microsoft, Merck and IBM. We weight simply by market capitalization, just like Standard & Poor’s. These companies are biggest in our fund, but they’re not necessarily the best socially responsible companies.

For example . . . a lot of people think [Coke is] selling a product that’s not so great and they are exporting a set of values. Who’s to say the people of China need to be exposed to Coke before they are exposed to democracy? But they have strong diversity, they aren’t in tobacco, armaments and gambling. Women have about 23% of the management positions, and they have a strong percentage of African Americans in management.

Times: Which companies could you say for sure that you would never buy?

Domini: I hesitate to say. Look at IBM. When we started, they had ties to military and South Africa. But they sold their military [operations] and South Africa stopped being an issue. I feel a little foolish to predict now. It’s hard to imagine a situation where Seagram [the Canadian liquor giant] would be doing something different, but you never know.

Then there are companies that fall out. Knight-Ridder was eliminated when they brought in replacement workers for the newspaper strike in Detroit. That’s an example where we feel it will take a long time before that company gets in again.

Times: What led to the decision to add Microsoft back last year?

Domini: We had them originally, but then they rushed back into South Africa ahead of their time, as it were. We were slow to put them back in, but in December we decided it was time.

Times: What do you say to critics who believe it’s smarter to invest very aggressively and just give a portion of money to charity?

Domini: I hope to be able to show that socially responsible investing can make a [high] return and you could still give your profits to charity. The economic and social marketplace. That argument doesn’t address the issue of discussion between To ask the Salvation Army to invest in alcohol companies while they are out trying to save alcoholics--it just doesn’t make sense.

* SOCIALLY RESPONSIBLE

Domini is part of trend. A1

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Domini Social Equity

Strategy: Seeks growth and income mainly by investing in stocks of large companies but excludes firms that profit from weapons, alcohol, tobacco, gambling and nuclear power. Attempts to find companies that produce safe products and foster good employee relations and diversity.

VITAL STATISTICS

Average annualized returns, as of Dec. 31, 1996:

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Domini S&P; 500 1-year 21.84% 23.07% 5-year 14.41% 15.23%

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Five biggest holdings as of Dec. 1: 1. Coca-Cola 2. Intel 3. Microsoft 4. Merck 5. IBM

Max. sales charge: None Assets: $130.5 million

Min. investment: $1,000 Phone: (800) 762-6814

Morningstar risk-adjusted performance rating, 1-5: ****

Sources: Lipper Analytical Services, Morningstar