Morningstar Advisor - June/July 2009 - 30

Spotlight Navigating the SRI Patchwork By William Samuel Rocco Socially responsible investing complicates the investing process. Here’s how to help clients work their way through the challenges. Advisors who are considering socially responsible investing funds for their clients face challenges, but they have a larger set of choices than ever before. Sure, there has been some consolidation among SRIscreened funds over the past year or so, just as there has been among nonscreened funds. For example, Ave Maria Rising Dividend AVEDX absorbed Catholic Equity Fund in 2007. But the universe of such funds has expanded significantly this decade. There were fewer than 80 SRI funds at the end of 1999 and roughly 130 SRI funds five years ago; today, there are more than 170 screened funds. And the total should continue to grow. Joe Keefe, the president and chief executive officer of Pax World Management, recently told us that his firm plans to launch three new exchange-traded funds centered around the KLD Global Sustainability Index and two other related benchmarks. What’s more, the set of SRI funds has become broader as well as bigger. Secular SRI funds dominated the universe a decade ago, but faith-based offerings have been launched at a fairly rapid clip in the 2000s and now make up half the total of all SRI funds. In the meantime, the number of green funds has increased from less than half a dozen a couple of years ago to nearly three dozen today. Several of the newer SRI options are in investment categories that previously had few if any screened offerings, including Appleseed Fund APPLX (a secular SRI fund in the mid-value group; see our profile of the fund on page 52), MMA Praxis Small Cap MMSCX (a faith-based offering in the small-growth category), and DWS Climate Change WRMAX (a green fund in the worldstock group). But advisors researching the universe of SRI funds will find that it still comes with real complications. First, in addition to the social screens that differentiate secular, faith-based, and green subsets from each other, there are significant screening variations within each of these subsets. Second, most SRI funds tend to have significant sector biases. Third, though the universe has expanded, there still are a very limited number of attractive screened funds in many categories, making it difficult to create a well-diversified, all-SRI portfolio. A Plethora of Criteria years. Some secular funds, such as Pax World Balanced PAXWX, can now own firms with ties to alcohol. And secular funds differ in how consistently and strictly they apply their social criteria, which ones they emphasize, and whether they take proactive steps to advance their social agendas or not. SRI funds—such as Neuberger Berman Socially Responsive NBSRX—that belong to a fund family that offers non-SRI funds tend to invest more readily in the least-offensive firms in problematic industries to achieve diversification. They also engage in less shareholder activism than do pure-SRI shops’ funds, such as Domini Social Equity DFESX. The three main types of faith-based funds are Catholic, Protestant, and Islamic, and they, too, have many similarities when it comes to their social criteria. All of these funds shun companies involved with alcohol, gambling, tobacco, and pornography. The funds vary considerably, however, in their overall philosophies and in some of their specific screens. The Catholic Ave Maria funds and the Protestant Timothy funds have conservative outlooks and spurn what they consider to be “anti-family” companies (such as those that offer domestic-partner benefits to their employees). The Catholic LKCM Aquinas funds, the Protestant New Covenant offerings, and On the surface, secular SRI funds seem to share many of the same screens and social criteria. They generally avoid firms with links to tobacco, alcohol, firearms, or weapons contracting, as well as those with significant environmental, workforce, or human-rights problems. They favor companies that are leaders in the areas of environmental sustainability and employee relations. But there have been a few changes in recent 30 Morningstar Advisor June/July 2009

Morningstar Advisor - June/July 2009

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