Mutual funds based on faith gain popularity

Socially responsible funds, and the ideals behind them, are becoming more mainstream, but building a truly diversified portfolio with them remains a challenge.

The realm of socially responsible investment funds is a niche that is growing - in fact, at a faster pace than the mutual fund world as a whole, according to Morningstar Inc. One of the things that can make it a confusing area for investors, however, is the wide diversity of values that socially responsible funds attempt to incorporate. Because the majority are fairly small in terms of assets, bargain hunters might not be thrilled with their fees.

Still, those who believe in the idea of looking beyond the basics of the balance sheet say that screening for good environmental, social and governance citizenship bears rewards.

"If a company has been thoughtful about the impact they have on the environment, chances are they've also been thoughtful about how they treat their employees," said Matthew Patsky, co-manager of the Winslow Green Growth Fund, one of the few small-cap socially responsible investment funds offerings. "There's growing evidence, and broadening acknowledgment, that these kinds of nonfinancial issues are important to long-term performance," he said.

Among large-cap domestic equity, a fair number of choices are available. One of the biggest socially responsible investment fund shops is the Calvert Group, which screens its holdings according to social criteria, eliminating alcohol, tobacco, gambling, and weapons companies, in addition to firms with poor environmental and labor practices. Among its funds is the Calvert Social Investment Equity, which has developed a good record under manager Dan Boone. Despite substantial asset gains, the fund's expense ratio has remained a relatively high 1.24 percent.

AMONG FAITH-BASED SHOPS, one of the best known is the Ave Maria Funds, which seek to incorporate Catholic values and "pro-family beliefs." Ave Maria screens out companies connected with abortion or pornography or offering nonmarital partner benefits to their employees.

What gets screened out depends on the church. New Covenant Funds, affiliated with the Presbyterian Church, uses broad screens to avoid alcohol, tobacco, gambling and certain elements of defense - specifically, companies highly dependent on military contracts and those that develop weapons that kill indiscriminately, such as nuclear weapons, land mines and chemical weapons. The idea is to avoid anything that can hurt noncombatants in a war, said George Rue, New Covenant's chief investment officer. Like many socially responsible investment funds, New Covenant isn't afraid of a little shareholder activism.

"We're not against a proper defense of our country," Mr. Rue said. "But we're trying to have some level of control. We're trying to avoid a heavy business sending military products to foreign countries, and indiscriminate weapons. We want to be a voice out there saying we want those things reduced."

Part of the reason it's difficult to create an all-socially responsible portfolio is that there are only a handful of pure international socially responsible funds, said Greg Carlson, a fund analyst at Morningstar.

"The SRI investing world is still relatively new. A lot of firms are still trying to establish a good track record in domestic small caps and mid caps," Mr. Carlson said.

Among the foreign options, the Calvert World Values International Equity might look appealing at first, but it has not done well compared to nonsocially responsible investment fund offerings. The shop brought in an accomplished subadviser, Grantham, Mayo, Van Otterloo & Co., in 2002, but the manager's value-investing style has not meshed well with Calvert's social screens, Mr. Carlson said. On top of that, he said, the fund's 1.96 percent expense ratio makes it too expensive to recommend.

A SECOND ALL-FOREIGN option is MMA Praxis International, a faith-based fund that incorporates Christian values and avoids industries that profit from alcohol, gambling, tobacco, abortion-specific products and military contracting. Although this fund has not been a great performer in the past, and expenses remain high, a new management team hired in 2003 makes it worth watching.

A third foreign option emerged when Domini Social Investments launched the Domini European Social Equity Fund on Oct. 3. Domini seeks to avoid companies that profit from tobacco, alcohol, gambling, nuclear power, firearms and military contracts, and also might exclude companies with poor corporate governance and labor records.

Some socially responsible funds offer limited international exposure, but there's no guarantee on how consistent that exposure will be because it's at the manager's discretion. For example, Pax World Balanced, a smartly managed stock-and-bond fund that routinely beats the returns of similar non-socially responsible offerings, has a 15 percent stake in foreign equities. With $1.8 billion in assets, it's one of the largest socially responsible funds around, a feature reflected in its relatively low 0.95 percent of expenses.

The Neuberger Berman Socially Responsible fund, a large-cap fund with an outstanding track record that has earned it five stars from Morningstar, has a 27 percent stake in overseas stocks. Others have sought opportunities abroad when there was a dearth of choices at home, including the Winslow Green Growth fund, which has invested in foreign wind stocks.

An inexpensive offering is the Vanguard Calvert Social Index fund, though it is in the midst of some changes as it switches its benchmark to the FTSE4Good U.S. Select Index, a socially responsible index provided by London's FTSE Group. The transition is expected by Dec. 31. Fees are not expected to change, nor is the fund's goal of avoiding alcohol, tobacco, gambling and porn.