Choosing the right mutual fund isn't as easy as looking at a chart and writing a check to the firm with the highest numbers. Everyone wants a winner, but it's important to remember that performance numbers don't tell the full story--even among socially-conscious funds. Many, for example, rack up high returns by investing in risky stocks. The star fund of one year may bring up the rear the next (usually, it seems, after you've signed on). And while it may rise again--over the years producing numbers that look appealing in a magazine's table--such volatility may not be worth the anxiety.
Expect good performance from your mutual funds, but only invest in those that are compatible with your financial situation and your stomach for risk-taking. Socially-minded investors should also consider a fund's social screening and shareholder activism rigor.
There is no simple, "the-envelope-please" answer to what is the best mutual fund. For aggressive, long-term investors (those looking for the highest possible returns, who can handle the ups and downs of the market) the Domini Social Equity Fund and Citizens Trust Index Fund stand out. Both are no-load (no up-front sales charge) index funds, which means they invest in companies on a predetermined roster. Both indexes are socially-screened versions of the market-indicating Standard and Poor's 500. (The Domini index has 400 stocks in its portfolio and Citizens has 300). And both funds actively pursue shareholder resolutions to improve corporate behavior.
"The biggest difference between us and Domini is that the Citizens Index is more rigorously screened for environmental criteria," says Joe Keefe, Citizens Trust vice-president. "There are, for example, no oil stocks in our portfolio. We even dropped Merck recently for environmental transgressions--even though it is popular with many socially-conscious fund managers and was performing well. We hold less heavy-industry companies and more technology-based businesses."
Franklin Research, recognizing the stricter standards of Citizens, gave it an "A-" grade for its socially-conscious, nonfinancial standards, while Domini received a "B+." (No fund received an "A" or "A+.")
While an index fund's lack of active management may sound scary to new investors, it usually pays off: It allows a fund to charge lower management fees and trade less than other mutual funds (meaning fewer commissions to pass on to fund holders and, typically, less taxes). An index fund also isn't subject to the emotional mistakes that even professionals make.
The S&P 500 index outperforms 80 percent of all fund managers--and both the Domini and Citizens Index funds have consistently outperformed S&P. As of last June, the Domini Social Equity Fund had returned 32.96 percent for one year and 30.3 percent annualized over three years. Citizens Index's numbers were 36.5 percent for one year and 30.7 percent for three years. The downside to Citizens' bigger holdings of technology companies is the fund tends to be more volatile than Domini.
For those who prefer investing in funds which will benefit nonprofits, consider the Green Century Equity Fund and DEVCAP. Both invest shareholders' money in the Domini Index. "The Green Century fund is run by a consortium of advocacy groups," says Tracy Graham, Green Century marketing vice-president. "Any profits the fund generates help further environmental efforts." DEVCAP asks its shareholders to donate a portion of their profits to organizations which fund micro-enterprise loans in developing countries.
Investors who are sensitive to market fluctuations should consider Ariel's Appreciation Fund and Pax World's Balanced Fund--both no-loaders (like all of the above funds). Ariel Appreciation has turned in impressive numbers (one year return: 34.4 percent; three year average: 29.2 percent) while remaining roughly one-third less volatile than the Domini and Citizens indexes. "A slow and steady turtle is our mascot, and we mean it," says Pam Cooley, Ariel's shareholder service associate. "The Appreciation's manager, Eric McKissack, sticks to stocks that are out-of-favor with Wall Street, but have good long-term prospects."
Pax World, ballasted by 30 percent of its portfolio in bonds, is even less volatile than Ariel Appreciation. In down markets, Pax World tends to sell sell off as much as the S&P 500, but it still has managed to produce good returns for its shareholders--23.81 percent for one year and 21 percent for three years. In September, The Wall Street Journal listed it second among the top 15 of all mutual fund performers for the previous 12 months.
The bottom line is there are great performing fund choices for social investors of all stripes. CONTACT: The Domini Social Equity Fund, 11 West 25th Street, Seventh Floor, New York, NY 10010-2001/(800) 762-6814; Green Century Equity Fund, 29 Temple Place, Suite 200, Boston, MA 02111/(800)934-7336; Citizens Funds, 230 Commerce Way, Suite 300, Portsmouth, NH 03801/(800)223-7010; Pax World Fund, 222 State Street, Portsmouth, NH 03801/(800)767-1729.
Marshall Glickman's book, The Whole Person Money Guide (Ballantine), will be published in May.