Morningstar Advisor - June/July 2009 - 31

the Protestant MMA Praxis funds have relatively liberal worldviews and employ environmental-responsibility, social-justice, and other criteria that are similar to those used by secular offerings. The Islamic Amana and Azzad funds shun banks and other financialservices firms as well as pork producers. Green funds employ a wide range of criteria. Those that focus on companies that are involved with one particular environmentally beneficial product or service, such as PowerShares Global Wind Energy PWND, are at one end of the spectrum. Funds that invest in a diverse mix of firms that have better environmental track records than their industry peers are at the other end of the range. Funds—such as Winslow Green Growth WGGFX—that pursue specific types of companies that either provide environmental solutions or operate in environmentally responsible manners fall in between. Significant Sector Biases A Primer on SRI By Michael Herbst When First Considering SRI Funds, Keep in Mind… r funds can be found at mainstream fund companies (Neuberger Berman, Vanguard, Dreyfus) SRI in addition to SRI-only shops (Calvert, Pax, Domini, Parnassus). Mainstream SRI funds tend to be less restrictive in their social screening than those from SRI-only firms. r company’s SRI definition is different. Some even vary between funds in the same family. Each Make sure the client clearly understands the firm’s SRI principles and definitions. r firms define SRI will shape their funds’ risk profiles. Funds with stricter mandates than other How offerings, for example, might be overweight in certain sectors. Building an All-SRI Portfolio: Tempting, but Challenging r principles can make funds under- and overweight in certain sectors. SRI r “Best-in-class” approach might offer greater diversification at the cost of being less SRI pure. r pickings are slim for domestic core value. SRI r Specialty or niche funds, such as alternative energy, can be concentrated and volatile. r funds can be (but aren’t always) more expensive than comparable non-SRI funds. SRI r Client may need to cobble together varying SRI processes. SRI Funds We Like Secular Neuberger Berman Socially Responsive NBSRX Pax World Balanced PAXWX Appleseed APPLX Vanguard FTSE Social Index VFTSX Faith-Based Amana Trust Income AMANX Amana Trust Growth AMAGX LKCM Aquinas Value AQEIX Ave Maria Rising Dividend AVEDX Green Portfolio 21 PORTX Winslow Green Growth WGGFX World Stock Small Growth Large Value Large Growth Large Blend Mid Value Large Blend Moderate Allocation Mid Value Large Blend Sector biases are a fact of life for SRI funds. Primarily because of their environmental- and workforce-related criteria, secular funds tend to be light on the traditional value sectors and heavy on popular growth sectors. The typical secular large-cap fund, for example, has far more hardware exposure and far less energy exposure than the S&P 500 Index. Meanwhile, the average secular foreign large-cap offering has much more health-care exposure and much less industrial-materials exposure than the MSCI EAFE Index. And while some secular funds have more marketlike sector exposure (because of their willingness to invest in the least-problematic firms in certain industries for diversification purposes), other secular funds have extreme sector stances for one reason or another. Vanguard FTSE Social Index VFTSX, for example, has a huge financials stake along with paltry industrial-materials and energy positions and hefty hardware and health-care weightings—all because of the social criteria embedded in its underlying index. Plan of Action: When a Client Asks About SRI Reassess Motives r What SRI goals is the client looking to achieve? r a SRI fund the best way to pursue those goals? Are there other ways to make a difference? Is Assign Homework r Suggest client read up on SRI: Calvert Investments, Portfolio 21, and KLD Analytics have excellent Web sites; Socially Responsible Investing, by Amy Domini (Kaplan, 2000), and The Ecology of Commerce, by Paul Hawken (Collins Business, 1994), are also helpful. r Make sure client understands the SRI strategy and underlying risks of potential picks. Take Long-Term View r all funds, SRI funds will hit rough patches. Like r Periodically revisit client’s investing and SRI goals. Michael Herbst is a mutual fund analyst with Morningstar. MorningstarAdvisor.com 31

http://www.MorningstarAdvisor.com

Morningstar Advisor - June/July 2009

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2009