Contributions
CiMEFFE
Helping Clients Select SRI Mutual
Funds and Firms
by Natalie Chieffe. DBA, CFR\ and Karen Eifers Lahey. Ph.D.
Natalie Chie/fc, DBA. CfP*, is an associate professor of
finance at Ohio t/niversit)i in Athens, Ohio. She is the
Executive Summary
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 responsibility? 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
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This study examines research on
socially responsible investing mutual
funds that includes definitions, strategies, and performance as a background
for understanding the concept and its
investment applications.The definition
of SRI is a function of the individual's
or funds' viewpoint and the specific criteria they are willing to adopt.There is
no generally accepted definition,
Major strategies for SRI are screening
of stocks, shareholder advocacy, and
community investing.
Advisors can choose from four different SRI indexes for use as benchmarks,
but the indexes overlap significantly in
the firms included in the indexes, so
advisors must choose carefully.
Most previous studies have found no
statistically significant difference
between 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 compared
the returns of conventional funds, and
our results support this finding. SRI
investors are not sacrificing returns.
The average annual return for the 78
SRI ftjnds selected for this study is 4.8
percent, while the return on the S&P
5CX) is 2.95 percent and the return on
the Domini Social 400 Index is 2.0 percent For the sample period of 2001 to
2006. the risk-adjusted return (RAR) on
the mutual funds is 37.3 percent the
S&P 500 IS 21.2 pencent and the
Domini Social 400 Index is 14.0 percent
We report the overall retums for 11 individual screens used to identify specific types
of socially responsible investing. Rnancial
pla^ners can detennine which funds may
be most appnopriate for their clients based
on the specific crrtena discussed and the
results provided in this study
formance. Within the strategies category,
three additional subcategories can he identified as (1) screening, (2) shareholder advocacy, and (3) community investment.
Malkiel and Quandt (1971) identified the
basic issues that were generally discus,sed
before the nomenclature of socially responsible investing was developed as a specific
approach to selecting investments. They
wrote an article in the Harvard Business
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CHIEFFE
Review just before the first SRI mutual
fund was introduced and they framed the
issues from the perspective of university
endowment funds. They stated that the primary objective of a university must he academic freedom, which requires that it
remain neutral on investment policies and
that it is fiscally irresponsible for an
endowment fund manager to accept lower
investment returns in an attempt to
achieve social goals.
The paper is particularly interesting
because it anticipated many of the issues
discussed in current articles on socially
responsible investing. Investors that may
be under pressure to invest based on social
goals, according to Malkiel and Quandt,
include pension fund managers, financial
institutions, universities, churches, and
charitable organizations. They proposed
the following questions;
• Are there companies whose securities
should not be held in the portfolio for
social, political, or moral reasons?
• Should the portfolio manager be
guided by such considerations in
voting his or her institution's stock?
• Should an investing institution
employ any of its resources in a positive manner for the sake of social,
political, or moral ohjectives? (p. 38)
The first SRI mutual fund was launched
on August 10,1971, as Pax World Fund,'
with $101,000 in assets. Two Methodist
ministers. Jack Corbett and Luther Tyson,
said they had two motivations for starting
the fund: (1) provide a Rind that allows individuals to invest in firms that share their
values, and (2) set specific standards of environmental and social responsibility that corporations should be challenged to live up to
in their business operations. This fund is
now known as the Pax World Balanced
Fund. Its Web site states that it is the first
fund "to use social as well as financial criteria in its investment decision."
Today, an SRI industry organization
known as the Social Investment Forum
(vw^iw.socialinvest.org) states that it is a
"national nonprofit membership organization promoting the concept, practice, and
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growth of socially responsible investing"
(2007). Its Web site indicates that from
1995 to 2007 the number of SRI funds
increased from 55 to 260, and SRI assets
grew from $639 billion to $2.71 trillion. In
the 36-year period from the funding of the
first SRI fund with $101,000 to today, it
would appear that this criterion for selecting investments has wide appeal. We now
turn our attention to SRI criteria, starting
with the effort to define SRI.
Definitions of Socialiy Responsible investing
Socially responsible investing can be
defined in a variety of ways, depending on
the viewpoint of the author. Henningsen
(2002) defines SRI as investing hased on
(1) choosing companies that reflect
investors' values, (2) bringing pressure on
firms that they invest in by engaging in
shareholder activism, and (3) investing in
projects that target community development initiatives. Hill, Stephens, and Smith
(2003) state that investors use socially
responsible investing to apply their beliefs
and values to firms they think use these
characteristics in operating their business.
In a project undertaken by the Natural
Capital Institute to describe the current
state of socially responsible investing,
Hawken (2004) identifies and examines
SRI retail funds with equity holdings. He
finds that over 90 percent of Fortune 500
firms are selected for inclusion in SRI
mutual fund portfolios, providing a very
wide definition of the term. SRI funds
promise that an individual inve.stor's
money will not be used to buy firms that
have distasteful products or track records
and that firms that display environmental
responsihility, proper governance, and
social justice will be selected. Hawken
states that anyone can call a fund an SRI
fund and take advantage of these criteria to
gain a marketing edge without holding a
philosophical viewpoint.
Gay and KJaassen (2005) state that
socially responsihie investing as a concept
has evolved over time. Screening criteria
used by fund managers have become more
LAHEÏ
Contributions
qualitative and include measures on workplace conditions and sustainable business
operations. They define SRI as "investing
in companies that meet certain baseline
standards of social and environmental
responsibility; actively engaging those
companies to hecome better, more responsible corporate citizens; and dedicating a
portion of assets to community economic
development." According to Kurtz (2005),
SRI is "a widely used but rather imprecise
term that implies unscreened portfolios are
irresponsible." In Europe, SRI refers to sustainable investing or green investing. Kurtz
concludes that it is a function of your
moral views and how you, as a fiduciary,
think markets work, if you follow quantitative factors and optimize your portfolio to
a benchmark, SRI will not be "too burdensome." If you focus on a small group of
stocks, you may be negatively affected.
Debates on the definition of socially
responsible investing can involve those
who view SRI based on "faith in supernatural forces and those who premise it on
beliefs in political ideologies and secular
philosophies," according to Statman
(2005). He discusses SRI based on political
ideologies and secular philosophies, and
that there are similarities and differences
in the two vievqioints, Firms can be viewed
on a continuum with no company being
perfectly socially irresponsible or perfectly
socially responsible. When analyzing
mutual funds, they can either be lenient or
strict in their criteria for SRI; but to successfully attract investors they must appeal
to a large and loyal enough group of
investors and be aware of competition
from other funds in terms of performance
and tracking errors.
The Social Investment Forum provides
data on funds that use SRI screens and provides analysis of their performance. It defines
SRI as the "process that considers the social
and environmental consequences of investments, both positive and negative, within the
context of rigorousfinancialanalysis." Based
on the research reviewed here, it appears that
there is no one generally accepted definition
of socially responsible investing. Rather it
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Table 1:
CNIEFFE I L A H E Ï
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 from
the manufacture of weapons-related products or from defense contracts. Some
funds exclude investments in U.S. Treasury securities.
5. Animal testing: Companies that conduct unnecessary animal testing for personal
care products. Some recognize that medical products are required to undergo
animal testing in compliance with the FDA.
6. Products/services: Companies in Pharmaceuticals, biotechnology, medical
diagnostic services, and products. Seek companies that provide eco-friendly
products, green technology, and organic/natural foods. Evaluate companies
based 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 use
natural resources properly. Exclude major electric utilities and companies whose
primary source of revenue is derived from nuclear generation. Avoid or limit
companies engaged in the genetic modification of plants and animals or in the
extraction of natural resources.
8. Human rights: Do not invest in companies with negative economic impact on
disadvantaged communities. Favor companies with best practices, and may
focus on women's issues9. Labor relations: Seek companies not involved in sweatshop operations, forced
labor, discrimination, unfair or unsafe labor practices, or Maquiladora operations
(Mexican assembly plants that manufacture goods for export, generally owned
by non-Mexican corporations).
10. Employment/equity: Seek companies offering equal employment opportunities,
with fair wages, and with safe working conditions. May choose to invest in
companies with women in management positions and strong benefits.
n. Community investments: Seek companies that direct capital to communities
underserved by traditional financial services, making it possible for local
organizations to provide financial services to low-income individuals and
capital for small businesses.
depends on the viewpoint of the individual, the firm, or the institutional investor.
Three Key Strategies
The Social Investment Forum states that
social investing includes three key strategies
of screening, shareholder advocaq^, and
community investments. It provides the
following definitions of the key strategies:
• Screening is the practice of evaluating
investment portfolios based on social,
environmental, and good governance
criteria.
• Shareholder advocacy involves
socially responsihle investors who take
an active role as the owners of corporate America.
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• Community investments direct capital
from investors and lenders to communities that are underserved hy traditional
financial services institutions.
Screening
SRI mutual funds typically use screening as
their main strategy. Tahle 1 provides a
description of 11 SRI screens used hy individuals and mutual funds to either include
or exclude a firm from an investment portfolio. The definitions represent our interpretation of these screens based on a variety of
sources including the Social Investment
Forum and individual fund prospectuses.
The first three screens of alcohol, tobacco,
and gambling are usually referred to as "sin
screens"fromtheir history as early as the
1800s, when churches avoided investment
in them (Henningsen 2002). Screen #6 is
for or against certain products and services.
This screen is most often promoted by various religious groups.
According to Statman (2005), today's
SRI movement started in the 1960s when
the country was in turmoil over the Vietnam War and dealing with struggles over
civil rights, women's rights, and environmental policies. This led to screens for
animal testing, products and services, and
the environment. Today, different screens
have become prominent with the collapse
of Enron and other issues of corporate
governance such as executive pay; labor
relations; employment; equal rights
opportunities by race, gender, and sexual
preferences; fair wages; and safe working
environments. Human rights, labor relations,
employment/equity, and community
investment round out the 11 screens.
A strong correlation between corporate
reputation (as defined by Fortune's list of
most admired firms) and SRI data on corporate social responsibility is found by
Waddock and Graves (1997). They state
ihat perception of the quality of management is related to performance but not to
environmental ratings. Russo and Fouts
(1997) find tbat the environmental ratings
of the firms have a significant impact on
their return on assets. Bello (2005) differs
from other studies because be explicitly
analyzes the relationship between ethical
screening on portfolio diversification and
the variable effect of diversification on
investment performance. He states that
"not a single characteristic of socially
responsible mutual funds is significantly
different from that of conventional funds."
Statman (2006) provides a description of
four different socially responsihle indexes used
as benchmarks for determining the performance of SRI investments. The four indexes are
(1) Domini 400 Social Index (DS400), (2) the
Calvert Social Index (Calvert Index), (3) the
Citizens Index, and (4) tbe U.S. portion of the
Dow Jones Sustainability Index (DJSI). He
finds that the four indexes have a positive
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Ciii[FFE I L A H E Y
correlation of greater than 90 percent, but
that they have a substantial tracking error
(deviation from a bencKmark). Additionally,
there is much overlap in thefirmsthat are
Included in each index.
The DS4Ü0 Index is produced by KLD
Research and Analysis, Inc. and excludes
firms that derive any revenue from manufacturing alcoholic or tobacco products,
gambling products or services, electric utilities that own parts of nuclear power
plants, and firms that generate more than
2 percent of sales from the production of
military weapons. The index also excludes
firms that have a negative record on environment, diversity, and employee relations.
The Calvert Index excludes firms that
profit from gambling, tobacco, and military
weapons, but it includes firms that produce
alcohol, firearms, and nuclear power. It
screens firms based on their performance
on workplace, product safety, international
human rights, community relations, indigenous people's rights, and the environment.
Citizens Index seeks firms with positive
records on screens that include corporate
governance, human rights, diversity, environment, employee relations, and animal
testing. It excludes firms that have any interests in tobacco or alcohol, lack diversity,
produce power firom nuclear plants, or have
a material interest in weapons or gambling.
DJSI, the fourth index, uses a different
approach from the other three. It focuses
on best-in-class selection rules that pick
the best firms in each industry in various
screening categories.
It appears that there is significant overlap in these four indexes as well as the various screens that have been discussed thus
far. This makes it important for financial
planners and their clients to carefiilly
select an appropriate index to use in comparing the performance of a particular SRI
mutual fund performance.
Jennings and Martin (2006) suggest
another approach to the social indexing of
funds. They propose using factor-based
models and commercial screening data to
select SRI firms to form individualized
portfolios. They discuss the problems
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involved in screening individual firms and
selecting funds that provide SRI because of
high expenses, tracking errors, and incomplete screens.
Sharehoider Advocacy
The second strategy for those interested in
socially responsible investing is shareholder advocacy. The only requirement for
filing a shareholder resolution is to own
$2,000 worth of a company's stock and to
hold it for at least a year. Hundreds of
these shareholder resolutions are filed each
year in an effort to change corporate
behavior, and they are put to a vote of all
shareholders at the annual meeting. Success is measured by having three percent
or more of stockholders vote for the resolution based on the fact that it allows the
stockholder to file another resolution on
the topic the following year.
select only a few to give a flavor of this
type of research. Hamilton, Jo, and Statman (1993) study 17 SRI funds and find no
statistically significant difference between
the risk-adjusted returns of socially responsible mutual funds and conventional funds.
Statman (2000) analyzes the performance
of the DS400 Index and finds that it is
somewhat riskier than the S&P 500 and
outperforms the S&P 500 for the period
1990-1998 in both raw returns and riskadjusted returns. He also examines a list of
31 socially conscious funds, selecting only
funds that have no more than 30 percent
in bonds and cash as defined by Morningstar. He finds that the mean expense
ratio is 1.5 percent, and only nine funds
were established before 1990. When Statman compares these funds to a matched
sample of 62 conventional funds, there is
no significant difference in performance or
expense ratios.
Barber (2006) examines the use of
shareholder advocacy by state pension
funds. He reviews the shareholder activism
programs of CalPERS, the California
Employees' Retirement System. Since
1992, the pension fund has published an
annual list of companies it thinks have curable governance shortcomings, and Barber
finds that the day the list is announced
there is an increase of $3.1 billion in shareholder wealth.
A survey sent to investors in Earth Sanctuaries Limited (ESL), an Australian firm
that conserves ecosystems and breeds
endangered species, finds that investors
buy shares in the firm because of its environmental mission rather than for financial considerations. The authors of the
study, Beal and Goyen (1998), conclude
that not all investors are wealth maximizers. Instead, these investors demand that a
"psychic utility component be included in
their returns."
Community Investment
Crutchley, Hudson, and Jensen (1998)
provide an examination of shareholder
advocacy by examining the CalPERS
announcement of target firms and forming
a portfolio of those firms on the announcement date. Returns are time-period specific, v/ith earlier periods having higher
returns than later periods. They suggest
that aggressive activism does increa.ie
shareholder wealth. Preece and Filbeck
(1999) examine the question of whether
firms identified as family-friendly earn a
higher return than firms that are not so
identified; their results indicate that there
is no difference.
The majority of papers that examine the
performance of SRI activities indicate that
A third strategy for social investing is community investment. It involves communitybased financial institutions (banks, credit
unions, and loan funds) that make loans
supporting local development in the
United States and developing countries.
The Community Reinvestment Act directs
banks to set aside a portion of their lending
for small-business development and lowincome housing.
Performance
Many of the SRI studies focus on performance from a variety of viewpoints. We
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CHIEFFE i LAHEY
there is no difference in investor returns
between SRI firms and conventional firms.
This suggests that individuals who choose to
invest in SRIfirmsor mutual funds are not
sacrificing investment returns. Retirement
planfiduciarieswill find such data of particular interest. The U.S. Department of Labor
recently updated its guidance that plan
fiduciaries "may never increase expenses,
sacrifice investment returns, or reduce the
security of plan benefits in order to promote
legislative, regulatory, or public policy goals
that have no connection to the payment of
benefits or plan administrative expense"
(DOL 2008). If pension managers are interested in SRI, they will have to prove that
they can maximize returns and consider
socially responsible factors.
Data and Results
To provide a more recent test of socially
responsible investing, we examined the
performance and criteria used by mutual
fiinds that self-identify as providing SRI
opportunities. The selection of SRI mutual
fijnds started on the Social Investment
Forum Web page, which listed 93 member
funds as of June 30, 2006. We augmented
this list of funds with the premium version
of tbe Morningstar.com Web site that listed
113 SRI fiinds. We combined the two lists
and examined tbem for the date of origination for each fund. We eliminated those
funds with fewer than 60 months of price
history, resulting in 78 funds for tbe
sample dataset. The period examined is tbe
60 months from April 2001 to March 2006
and it allows for tbe production of 59 bolding period returns.
Table 2 illustrates tbe distribution of
fiinds based on tbree different choices for
each of the 11 screens: (1) no screen, indicating tbat funds do not use this screen for
selecting companies; (2) screen for, indicating tbat funds select companies tbat
have a positive record on tbis screen; and
(3) screen against, indicating that funds do
not select companies tbat have a negative
record on this screen.
Funds that do not use a particular screen
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Table 2:
Distribution of SRI Fund Screens
No Screen
Screen For
Screen Against Total Funds
Alcohol
3i
0
4/
/o
Tobacco
n
0
67
78
Gambling
36
0
42
78
Defensive Weapons
30
0
48
78
Animal Testing
42
0
36
78
Products/Services
24
40
14
78
Environment
30
35
13
78
Human Rights
35
34
9
78
Labor Relations
33
40
5
78
Equality
36
38
4
78
Community Investments
47
28
3
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 community
investing category and least likely to
appear in the tobacco screen. Tbe small
number of funds tbat do not screen for
tobacco may reflect its traditional role as
one of tbe "sin screens," witb tbe other two
being alcohol and gambling. The "screen
for" column has no funds in thefirstfive
screens, which is intuitively logical in that
they represent negative factors for socially
responsible investors. In the "screen for"
column, tbe most funds (40) are in the
products/services and labor relations
screens. Screens "against" are used in some
areas by most of tbe funds. The largest
"screen against," after tobacco, is defensive
weapons (48). Relatively few funds consider corporate responsibility screens
involved witb products, environment,
buman rights, labor relations, equality, and
community investing.
Tbe religion-based fiinds tend to screen
against certain criteria such as pornography, abortion, gambling, and alcohol. For
example, Islamic investing is based on
Islamic ethics (Shari'ab), which prohibit
money going into companies involved in
alcohol or gambling, and companies that
make profits from interest payments, such
as banks and insurance groups. Mennonite
and other Anabaptist investors avoid
nuclear energy stocks, defense contractors,
and U.S. Treasury bonds tbat support
Defense Department spending. Members
of the American Jewish community invest
in projects tbat promote socially responsible community development and sbareholder activism. Catholics shun enterprises
tbat support abortion or contraception or
provide domestic partner benefits for
unmarried or gay couples. Conservative
Christians bave a wide variety of investment choices that do about the same moderate screening as secular organizations
offering socially responsible funds, but
they use the profits to support Christian
communities and values. Other funds
catering to conservative Christians avoid
investments in enterprises their clients disapprove of.
Most funds screen for more than one criterion, with a possible explanation that they
are attempting to increase their attraction to
a greater number of SRI investors.
We compare tbe returns on our set of
SRI funds to tbe Standard & Poor's 500
(S&P 500) Index and to the DS400 Social
Index. We choose the S&P 500 to represent
the overall universe of stocks from which
investors may choose. The DS400 represents the universe of socially responsible
stocks from wbich we assume the SRI fund
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Table 3:
CHIEFFE
LAHEY
Average Returns and Risk-Adjusted Returns, 2001-2006
Sample SRI Funds
Coinpanies
S&P 5 0 0
DS400
50Û
400
5
Funds
78
Years
5
5
Average Return
4.8%
2.95%
2.0%
Standard Deviation
13.0%
13.9%
14.3%
21.2%
. ^ i^H.14.0%
Ki
Risk-Adjusted Return
37.3%
.^H
Annual Returns for Screens Used by SRI Mutual Funds,
2001-2006
Table 4:
Screen
For
None
Returns
Alcohol
6.4%
Tobacco
Return
51.2%
Returns
Return
!
Returns
RiskAdjusted
Return |
4.0%
416%
3.2%
25.6%
5.2%
46.9%
!
Gambling
5.9%
48.2%
!
4.1%
43.0%
!
Animal Testing
5.5%
50.2%
!
4.2%
39.8%
Defensive Weapons
6.3%
48.5%
!
4.1%
43.4%
!
Products/Services
6.6%
52.1%
!
5,7%
53.4%
!
!
!
3.7%
38.6%
6.6%
54.1%
!
3.9%
372%
3.9%
47.6%
Human Rights
6.1%
50.1%
!
3.6%
40.0%
5.5%
47.6%
Labor Relations
70%
56.8%
!
3.3%
379%
4.4%
30.9%
Equality
6.4%
53.0%
!
3.4%
42.0%
3.1%
19,2%
Community Investments
5.6%
46.5%
!
4.0%
45.7%
3.4%
25.6%
3.7%
40.2%
4-3%
39.9%
Environment
Averages
^IB|RR^^^°
Overall Average
48.7% !
4.6%
Overall Risk-Adjusted
Return
43.0%
' < -ireater than the average risk-adjusted return
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 riskadjusted return on the sample set is 37.3 percent, 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
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the S&P 500 and the DS400 Index. The differences 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 positive 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 percent) have RARs that match or outperform
the overall sample RAR of 43 percent. Further, 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, products, 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 calculated the percentage of mutual funds holding that company. Thirty-seven companies
were on the list, with 33 of them components 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. Thirteen 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 companies may not have the resources to be as
socially responsible or they may simply not
have the resources to prove they are. In addition, 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
Table 5:
I
CHIEFÍE I LAHEY
S&P 5 0 0 Companies Frequently Listed in Top Ten
Holdings by SRi Funds
Most Often Found
in Top Ten Holdings
of SR] fund5
Number and Percentage
of Times in Our 78
Fund Sample
18
, S.08%
tí 6
JP Morgan Chase & Co.
16
20.51%
17
Bank of America
14
17.95%
12
Procter & Gamble
13
16.67%
24
Johnson & Johnson
12
15.38%
32
Microsoft
n
14.10%
48
AT&T
10
12.82%
39
Citigroup
10
12.82%
8
Exxon Mobil
10
12.82%
1
Pepsi
9
11.54%
61
Intel
8
10.26%
49
Wells Fargo
7
8.97%
46
Pfizer
7
8.97%
31
Goldman Sachs Group
7
8.97%
41
General Electric
7
8.97%
7
Chevron
6
7.69%
4
Home Depot
5
6.41%
14
Hewlett-Packard
5
6.41%
11
Emerson Electric
5
6.41%
126
Conoco Phillips
5
6.41%
6
Amgen Inc.
5
6.41%
-
American International Group
5
6.41%
9
Verizon Communications
5
6.41%
18
Lehman Brothers Holdings
4
5.13%
62
FedEx
4
5.13%
70
Costco Wholesale Co.
4
5.13%
28
Baker Hughes Inc.
4
5.13%
310
Apache Corporation
4
5.13%
299
Texas Instruments
4
5.13%
167
Sysco
3
3.85%
68
Merck
3
3.85%
95
Intuit
3
3.85%
-
Colgate Palmolive
3
3.85%
204
UPS
3
3.85%
44
applied. The lack of difference between
the two comparisons illustrates the difficulty in identifying SRI funds. While the
negative screen includes more funds, the
same firms appear in both criteria.
68
Ranking
as Fortune
„ppji-^OOFirm
Journal of Financial Planning
\ FEBI!IIABY2009
Conclusions
This study provides a guide for financial planners 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 categories of definitions, strategies, and performance. 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 characteristics the client wants and make sure tbe fund
or ñrm fits the criteria. Of the three commonly 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 outperform the average for all screens, for the
S&P 500, and for the DS400. The highest riskadjusted 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 statistically 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 compared 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.
m
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Contributions
Table 6:
CHIEFFE I LAHEY
Incidence of the Same Large Companies Appearing in
îjng Different Screens
Alcohol
No Screen
31 Funds
Tobacco
Gambling
11 Funds
36 Funds
AT&T (3)
Bank of America (3)
AT&T (5)
Bank of America (4)
Chevron (3)
Bank of America (8)
Cisco (5)
Citigroup (2)
Chevron (5)
Citigroup (5)
Exxon Mobile (3)
Cisco (6)
Exxon Mobile (6)
General Electric (2)
Citigroup (8)
General Electric (5)
IBM (2)
Emerson Electric (7)
Johnson & Johnson (3)
Johnson & Johnson (2)
Exxon Mobile (8)
Microsoft (4)
JP Morgan Chase (2)
General Electric (7)
Pep5i C3)
Microsoft (2)
Hewlett-Packard (4)
Procters Gamble <4)
Procters Gamble (3)
Microsoft (5)
Negative Screen
47 Funds
67 Funds
ATST C9)
AT&T (5)
Bank of America (10)
Bank of America (11)
Bank of America (6)
BP(7)
Cisco (17)
BP(6)
Cisco (13)
Citigroup (8)
Cisco (12)
Intel(7)
Exxon Mobile (7)
Intel (7)
Johnson & Johnson (9)
Johnson S Johnson (10)
Johnson & Johnson(9)
JP Morgan Chase (14)
JP Morgan Chase (14)
JP Morgan Chase (12)
Microsoft (7)
Microsoft (9)
Microsoft (6)
Pepsi (6)
Pepsi (7)
Pepsi (5)
Procters Gamble (9)
Procter S Gamble (10)
Procter & Gamble (9)
1.
www.paxworld.com/02_history.html.
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