Portfolios With a ‘Conscience’ Have Big Players Thinking Up New Funds

This business of “socially responsible” mutual funds is getting serious.

We don’t mean serious in the sense of solemn and earnest. Funds that invest with a social conscience have been solemn and earnest since they were invented almost 30 years ago.

We mean serious in the sense of big-time. In the last few weeks, two prominent money-management firms have said they plan socially responsible funds: the $520-billion Vanguard Group and the $250-billion Teachers Insurance and Annuity Assn.-College Retirement Equities Fund, known as TIAA-CREF.

“With Vanguard and TIAA-CREF entering the arena, it appears that socially responsible investing has finally come of age,” said analyst Emily Hall on the Internet site of fund-tracking firm Morningstar Inc.

Vanguard, which runs the second-largest fund group behind Fidelity Investments, plans an index fund pegged to the Calvert social index, a group of stocks screened for the companies’ social and environmental policies. The screening system, which excludes tobacco, alcohol, gambling and nuclear power companies, among others, was devised by the $6-billion Calvert Group, one of several specialized firms that have heretofore dominated the world of socially conscious funds.

TIAA-CREF, an insurance and pension-fund heavyweight that opened its first six mutual funds two years ago, said it will use the social screens it already employs in its Social Choice Account for pension funds. That account had $3.8 billion in assets as of Sept. 30.

One difference: The pension account blends stocks, bonds and money-market investments, whereas the mutual fund will focus on stocks only, according to spokeswoman Claire Sheahan.

By the broadest definitions, more than $1 trillion is now invested in pension plans, mutual funds and other institutional pools of money managed with some social screening standards. The number varies a lot depending on whether you include funds that use religious criteria, and how you define “socially responsible.”

“Every investor across the globe has a personal value system, whether they are currently described as values-based, socially responsible, or even if they don’t currently screen at all,” said Craig Van Hulzen, writing on the Christian Web site Crosswalk.com.

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Besides their prestige and marketing muscle, Vanguard and TIAA-CREF bring other important elements to socially responsible investing. They are known as two of the lowest-cost providers of financial services anywhere. So their entry promises some “much-needed competition,” Hall said.

In a study published in October, Morningstar found that the management fees at the average socially responsible fund were 15% higher than for similar funds that do not use social screens. “Apparently, many [socially responsible] funds’ sense of social responsibility doesn’t extend to how much they charge their shareholders,” Hall and consultant Jon Hale said in the study.

Advocates for such funds, however, say higher fees are justified by the expense of screening, which requires extensive research. Vanguard and TIAA-CREF, with their low-cost approaches, will put that argument to a test.

Vanguard and TIAA-CREF also will offer their funds without “loads,” or sales charges. Many socially responsible funds now on the market come with sales fees ranging up to 4.75%, in the case of a fund like Calvert’s Social Investment Fund Balanced Portfolio.

Maybe the two newcomers will also shed some helpful light on the question of what social-responsibility investing can and cannot hope to achieve. On single issues like apartheid, one of the causes around which socially conscience funds first rallied, they have already demonstrated that they can be a force to reckon with, attracting widespread support.

But the wider mission of deciding which companies are socially responsible and which aren’t is no simple matter.

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Just for the sake of discussion, let’s consider the stocks of publicly traded mutual fund companies themselves, which have many social virtues to recommend them.

For example, funds are open to all comers, without any issue of race, religion or gender. In any part of the business where firms such as Vanguard and TIAA-CREF go, there is vigorous competition. And thanks to funds, small investors presently can earn a return of more than 5% on their savings in money funds, double what many banks would pay them.

Mutual funds have also done a great deal to give ordinary people access to ownership of the means of production. If Karl Marx were around today, it would be interesting to ask him what he thought of mutual funds.

But before anybody snaps up a fund-company stock like T. Rowe Price Associates or Franklin Resources Inc. as an agent of good, don’t you have to look at what their funds invest in?

At last report, Price accounts held about 12.5 million shares and Franklin 4.9 million shares of Philip Morris Cos., noted as a purveyor of both cigarettes and beer (Vanguard and TIAA-CREF accounts have been big investors in Philip Morris too).

Still, for many investors, socially responsible funds that simply screen out the “hot-button” industries of defense, tobacco and gambling offer a reasonable place to start applying values to a portfolio.

And what about performance? One of the largest socially responsible funds, the Domini Social Equity fund, managed a 254% total return in the five years ended Dec. 16--actually beating the average Standard & Poor’s 500 index fund’s gain of 234%.

It has helped, no doubt, being out of tobacco stocks in that period. Likewise, the fund has benefited by being invested in many of the technology companies that most socially responsible funds consider to be advancing the good of humankind.

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Paul J. Lim will return next Sunday.