Bloody But Unbowed.

Socially conscious investors hanging in

That cloud of dust you see hanging over Wall Street is a dot-com gold rush that reversed into a bear-market stampede, leaving a huge hole in the economy as well as investors' pockets.

Former high fliers among upstart telecommunications firms and Internet service providers are either bankrupt or reduced to nearly worthless penny stocks. And while champions such as Cisco Systems, Nortel Networks and Yahoo! have been humbled by the downturn, once reliable "widows and orphans" stalwarts like AT&T are also choking in the undertow.

While virtually no one was spared in the past year's stock market bloodbath, you might expect so-called socially responsible investors to rank among the hardest hit. After all, most "socially responsible" or "green" funds reached dizzying heights on the updraft of "clean" high-tech stocks over the past five years. But a closer look shows it ain't necessarily so.

"I thought the last eight months of 2000 were really going to hurt the socially responsible mutual funds because many of them were heavily weighted in the tech stocks," said Steve Schueth, president of First Affirmative Financial Network in Colorado Springs, Colo., and director of the nonprofit Social Investment Forum in Washington, D.C. "However, when we looked at the data in January, that wasn't the case."

In fact, 14 of the 16 funds screened to exclude socially or environmentally undesirable stocks with $100 million or more in assets earned top marks from two respected ratings agencies -- Morningstar and Lipper Analytical Services. Of the 47 socially responsible funds tracked by the ratings agencies, 15 -- or 32 percent -- ranked in the top quartile by another ratings firm, Weisenberger.

Morningstar, meanwhile, bestowed industry-best four or five stars on 19 of the 47 funds. And, Lipper gave A or B ratings to 15 of the funds for three years ending March 31.

Despite the 2000 debacle, the socially responsible index has outperformed the broad market barometer Standard & Poor's 500 index in total returns for a decade. "The bottom line is we're holding our own and actually doing a little better than we might expect," Schueth said. "In other words, we haven't slipped as a category anymore than anyone else. In fact, we're doing a little bit better than everyone else."

Still, holding your own in this market does not exactly call for party hats and champagne.

Fewer than 8 percent of all stock funds managed to produce a gain of any kind in the first quarter of 2001, according to Lipper, and the average stock fund lost 13 percent. Growth funds fell more than 21 percent as the technology plunge continued with a 34 percent drop. For the 12 months ending March 31, the tech sector lost an alarming 62 percent in its value.

"The devastation started in April of 2000," Schueth said. "People got hammered throughout the second, third and fourth quarters through the first quarter of 2001. It's been a very tough year this past 12 months."

Despite the positive evaluations by the rating agencies, one benchmark, the Domini 400 Social Index, underperformed the S&P 500 in 2000 for the first time in five years. Due in part to overexposure to the computer hardware industry and underexposure to the rebounding energy sector, the DSI 400 lost 14.32 percent for 2000, compared to a 9 percent drop in the S&P 500. Over the long haul, things look better. For the decade ending Dec. 31, the Domini index enjoyed a gain of 19 percent compared to the S&P's 17.5 percent growth.

Domini's 10 largest holdings in the 400 index include a who's who of the tech sector: Microsoft Corp. (5.41 percent); American Intl Group, Inc. (3.46 percent); Intel Corp. (3.29 percent); Merck & Co. (3.25 percent); AOL Time Warner Inc. (3.22 percent); SBC Communications (2.8 percent); Verizon Communications (2.47 percent); Johnson & Johnson (2.26 percent); Cisco Systems (2.14 percent); and Coca-Cola (2 percent).

"A number of factors contributed both to the sluggish stock market and to our own underperformance," Domini founder and President Ami Domini told her investors in a recent report. "The most important contributing factor was that the outlook for the domestic economy is less clear now than at any time since 1992."

She told investors, "Slowdowns in consumer spending, along with the lack of new orders from corporate customers, have led to a complete reevaluation of the future growth of the technology sector. We believe that such concerns may be overstated."

While Domini continues to exclude the large oil companies in her index, the fund will continue to seek out those developing clean, alternate sources of energy. With prices soaring, prospects for alternative energy are brighter, she said.

In defense of their portfolios, many individual and institutional investors have been shifting toward the bond market, which just scored its best quarter in nearly four years. On average, bond funds gained 2.24 percent in the first quarter. If you want to live on the wild side, you can even invest in socially responsible junk bond funds these days.

Of course, anyone who bailed out of the tech-heavy Nasdaq before its death spiral looks like a genius now. But stock market peaks are often harder to call than bottoms. Still, Kevin O'Keefe, manager of mutual fund programs for First Affirmative Financial Network said these warning signs should have been noted: The irrational enthusiasm for dot-com companies; the surge in day-trading activity; concentration of investment gains among a very small number of "glamour" stocks; and disdain for tamer investment strategies such as the 'silly' notion of diversification.

"It is important to understand that all investors have felt the sting of this market, even those who have followed a diversified strategy reflecting the risk tolerance and long-term growth objectives," O'Keefe said. "Those who abandoned discipline and diversification, however, have been crushed."

While some individual investors should adjust their portfolios to reach short-term goals, institutional investors including foundations and nonprofits have generally taken a cautious approach and a long-term perspective, Schueth said.

Despite the bloodshed in 2000, the numbers of socially responsible funds actually grew with the entry of two giants -- Vanguard and TIAA-CREF. Among the long-term players in the once marginal field of green investing, the new players caused some anxiety because of their ability to sell their services at lower cost while developing massive funds.

"One area where many SRI funds don't do well is fees and expenses, which can frequently be higher than comparable non-SRI funds," said Motley Fool analyst Chris Rugaber.

The Vanguard Calvert Social Index Fund launched in May, 2000 includes 468 stocks screened against tobacco, firearms, alcohol, nuclear power and gambling. The fund also factored corporate records on the environment, workplace, native peoples, human rights and product safety.

The fees of 0.25 percent or $7.50 of the minimum $3,000 investment is far below the 1.16 percent expense ratio of the average SRI fund in Morningstar's database. A 1.16 percent expense ratio on $3,000 is $34.80.

"So far, the pressure on pricing has not really developed into anything," Schueth said. "I haven't seen a lot of marketing from those guys. One of the concerns was that they were going to come in and suck up all the business and that hasn't happened."

Socially responsible funds are also increasing as more special interest groups put their money where their mouths are. Religious groups opposed to pornography, alcohol and other issues continue to invest and advocate positions as shareholders.

At AT&T's annual meeting in Cincinnati, for example, Vidette Bullock-Mixon, director of corporate relations and social concerns for the General Board of Pension and Health Benefits of the United Methodist Church, challenged AT&T Chairman C. Michael Armstrong to drop the adult Hot Channel from those carried on AT&T cable.

Other mainstream companies also experience pressure from socially responsible investors. Wal-Mart, for example, is on the defensive concerning labor issues and its ranking as the nation's top firearms merchant.

Not only is the current economic climate putting pressure on socially responsible funds, battles over President Bush's plans to open federal lands to energy exploration and social upheaval are likely to challenge the funds to keep pace in a changing world.

"Grassroots community organizers, local soup kitchens and even national service organizations tell us that the alarming spread of poverty has been all too well hidden," Domini said. "We live segregated lives, avoid traveling into decimated cities and calculate the minimum living wage by grossly outdated means. Until a national effort to address poverty emerges, income disparities will continue to threaten the future economic well-being of the nation. As investors, however, we cannot wait for that effort to materialize. We must do what we can to create lasting solutions to poverty now."

Richard Williamson is a reporter for the Denver News Bureau.