E C O N O M I C S VALUABLE VENTURES Socially-Conscious Investment Funds By Garth Bray ETHICAL OR "SOCIALLY CONSCIOUS" investing is a growing trend. The leading socially-sensitive mutual fund accounts--perhaps the most accessible means to invest along ethical guidelines-- have expanded remarkably over the last several years. The Pax World Fund, started in 1971 and described as the grandfather of the social investment funds, was managing assets of $7.1 million in 1982. By the end of 1987, that figure had grown to $77.2 million. And the total volume of assets now under socially responsible management, though difficult to assess with precision, is significant. A recent report on ethically-minded investment services put out by the Interfaith Center on Corporate Responsibility estimates the total value of portfolios that have been screened according to ethical criteria at $400 billion. The overwhelming majority of the accounts making up that total are termed "ethical" because a single social or political "screen" has been applied to prospective investments. With the success of the South African divestment campaign, for example, many investment firms can now create a South Africa-free portfolio upon request. Similarly, the average broker or investment adviser can screen from a portfolio investments tied to unpopular activities like nuclear energy and weapons production. With a few exceptions, however, standard investment firms are less willing to accommodate investors who want to maintain diversified portfolios and at the same time apply ethical investment criteria. According to Farnum Brown, of the ethically-oriented investment firm Advent Advisors, many mainstream investment firms just do not offer such services. "You're going to have to find a broker who has taken a personal interest in socially responsible investing. It's not going to be something that is sponsored or sanctioned by the firm." This means that investors with more than single-issue, social goals can either take it upon themselves to research investment prospects or turn to specialized investment advisers and mutual fund accounts. Mutual funds, generally recommended for smaller investors, essentially allow shareholders to pool their resources in order to benefit from the professional management and investment diversification that large accounts enjoy. Each fund is managed for a specific, declared purpose; that purpose, along with an outline of the types of investments that fund managers intend to make, must be spelled out in a filing required by the Securities and Exchange Commission. In other words, investors can be reasonably well assured that promised, ethical criteria are in fact being applied to their investment dollars. Furthermore, despite traditional Wall Street skepticism about selecting investments for other than purely financial reasons, ethically invested funds have recently been posting impressive returns. In July, for example, the Wall Street Journal wrote that "socially screened funds are outperforming many competitors and luring some conventional, purely profit-oriented investors. Through mid-July, Ariel Growth, Parnassus and six other 'altruistic' funds beat the 11.23 percent total return on the Standard & Poor's 500-stock index and the 12.81 percent average return for all general equity funds..." There is also evidence that ethical funds weathered the October, 1987 market crash better than others. The Pax World Fund, for example, was down eight points for the two-week period that covers the crash, while the Dow Jones Industrial Average was down 15. Brown, of Advent Advisors, offers a more colorful illustration. A married couple doing business with his firm maintained separate investment accounts, the wife wanted her money invested ethically and the husband had no interest in non- financial investment criteria. The day of the crash, the value of the husband's account dropped by 30 percent; the wife's investments dropped by 7 percent. Brown was quick to add, however, that he interprets these kinds of results as a function of the relatively cautious way that ethical portfolios tend to balance stock holdings with bond and cash investments, not necessarily as commentary on the quality of the companies that ethical investors support. On the downside, the investment controls applied by fund managers may not, in some cases, be stringent enough for investors with ambitious ethical goals. As Jack Corbett, one of the founders of the Pax World Fund, noted in an article that appeared in Changing Times last year, "None of the stocks Pax invests in are paragons of virtue. We're selecting the better over the worse, not the perfect over the utterly horrible." The problem is largely that, while fairly simple screens can readily weed out defense contractors, nuclear energy producers and the like, fund managers find that screening for more subtle criteria--things like the quality of a company's labor relations, the nature of its Third World activities, or its environmental history--is a more difficult undertaking. Likewise, actively seeking out the "paragons," investments in support of worthwhile projects or positive corporate policies, is a complicated process. However, as the fund descriptions below indicate, some fund managers do make the effort. In any case, each of the leading social investment funds approach the problem differently, and should be evaluated accordingly. The Ethical Mutual Funds THE CALVERT GROUP The Calvert Group maintains the Ariel Growth Fund and four sets of portfolios under the general heading of the Calvert Social Investment Fund. Both funds were established in 1982. The U.S. Trust Co. of Boston manages the Social Investment Fund. The Ariel Growth Fund Assets under management: $31.3 million 1988 investment performance: (to Nov. 30) +33.89% Investment requirements: Minimum investment, $2000 ($1000 for I.R A. accounts); 45 percent sales commission, declining for large investors; management fees of 0.65 percent of average daily net assets. Investment criteria: Ariel is the less socially concerned of Calvert's two funds. Most of its criteria are financial: it seeks investment growth and income by finding small, overlooked companies with healthy projected growth rates--in other words, undervalued, underpriced investments. However, the fund screens out companies with business ties to South Africa (including licensing arrangements), as well as companies involved in weapons and nuclear energy production. The fact that the fund's largest, current holding is of stock in Caesar's World, the hotel and casino operation, is an interesting commentary on its ethical criteria. Largest stock holdings: Caesar's World, Clorox Corp., Ecolab, McCormick Spices. The Social Investment Fund Assets under management, and 1988 investment performance (to Nov.30): Managed Growth Portfolio: $172.5 million; +9.21%; Money Market Portfolio: $89.5 million; performance n/a; Bond Portfolio: $6 million; +7.76%; Equity Portfolio: $2.2 million; +12.72% Investment requirements: Minimum investment, $1000; 45 percent sales commission, declining for large investors; management fees of 0.7 percent of average daily net assets. Investment criteria: Each of the four portfolios has different investment objectives, with the Equity portfolio being the most aggressive in seeking capital growth, and the Money Market being the most cautious. The same screens, however, are applied to all funds: no investments are made in companies with South African business operations or in companies involved in nuclear power or weapons production. Fund managers also look to a company's environmental history, its labor relations record, and a number of less tangible standards defined in the fund's prospectus as "a commitment to human goals such as creativity, productivity, self-respect and a responsibility to the company and the world." The Social Fund has been a leader in seeking out positive reasons to invest in particular operations--exemplary performances in areas like participatory management, equal opportunity promotion, and environmental protection. Fund managers are also willing to occasionally take an activist position. Calvert, for example, became involved in a recent labor dispute at one of its long-time holdings, Angelica Corp., and eventually introduced a shareholder resolution over the matter. Largest stock holdings: Washington Post, Digital Equipment, Maytag, Sonoco Products, Ametek. THE DREYFUS THIRD CENTURY FUND The only ethical fund in a group of funds managed by the Dreyfus Corporation, Third Century, established in 1972, is described as the most "mainstream" of the leading social funds. It doesn't automatically screen out weapons manufacturers, for example, and it only began screening out investments tied to South Africa in 1985. Assets under management: $149.9 million 1988 investment performance: (to Dec. 13) +21.82% Investment requirement: Minimum investment, $2500; No sales commission charges; management fees of 0.75 percent of average daily net assets. Investment criteria: Seeks investment growth primarily through common stocks. Its selection strategy consists of looking for "best of industry" performances in four areas: protection, improvement, and proper use of the environment; occupational health and safety; consumer protection and product purity; and equal employment. The fund, however, will invest up to one third of its assets, without regard to this four-point evaluation, in companies seen as working on "quality of life enhancing" products or technology. The fund does not screen out nuclear or defense activities, but does screen out businesses tied to South Africa. Largest stock holdings: Hercules, Rorer Group, Enron, Astra, Avnet. NEW ALTERNATIVES FUND, INC. Founded in 1982, New Alternatives is a fairly small fund, primarily concerned with energy issues. It tries to focus investment in companies that create energy from non-traditional sources; current examples include companies working on cogeneration (processes of energy production that create usable by-products) and photovoltaics (use of semiconductor technology to generate solar energy). The fund, however, interprets alternative energy broadly, to include, for example, coal sources. Assets under management $6.1 million 1988 investment performance: (to Dec. 13) +23% Investment requirements: Minimum investment, $2650; 5.66 percent sales commission charge. Investment criteria: Seeks long-term growth through equity investments in alternative energy, increasingly with a view to positive environmental results. To limit the financial risk in this uncertain investment field, the fund will not invest more than 25 percent of its assets in companies not listed on the New York or American stock exchanges. It will not invest in nuclear power or nuclear weapons, and discourages, without barring, investment in petroleum companies, companies connected to South Africa, and companies with poor labor/employment histories. Largest stock holdings: Ametek, H.B. Fuller Co., Odgen, Zurn, Thermoelectron. THE PARNASSUS FUND Established in San Francisco in 1985, Parnassus stresses traditional, social guidelines--no alcohol, tobacco or gambling- related investments, for example--but factors in a self- described "contrarian" investment strategy; essentially, this means it buys out-of-favor companies that show turnaround potential. Assets under management $10.1 million 1988 investment performance: 35.5% Investment requirements: Minimum investment, $5000, subsequent minimum contributions, $1000; 3.5 percent sales commission, declining for large investors. Investment criteria: Seeks long- term growth by investing in out-of-favor companies that show five "Renaissance" qualities: 1) market a high quality product or service; 2) demonstrate strong customer relations; 3) exhibit a strong sense of community service; 4) show an ability to innovate; and, 5) treat employees well. The fund will not invest in nuclear energy or weapons, weapons contractors, or in alcohol, tobacco or gambling industries. As of 1987, Parnassus will not invest in companies with South African operations. Largest stock holdings: Margaux Controls, Convergent Technologies, Advanced Microdevices. PAX WORLD FUND Founded in 1971 by two retired Methodist clergymen, Pax was the first of the ethical mutual funds. It applies more extensive screening criteria than any of its competitors, and abides by the golden rule that all of its investments involve "life- supportive" products and services. To determine desirability of potential investments, the fund sends lengthy questionnaires to all target companies before acting. And when an approved company acts in such a way as to require Pax to unload its holdings, Pax officials seek to apply pressure by registering their opposition with the company's management. Assets under management: $73.0 million 1988 investment performance: +11.07 Investment requirements: Minimum investment, $250. No sales commission charges, 0.75 percent management fees. Investment criteria: Looks to generate investment income first, growth second, through holdings in companies which, according to the Pax prospectus, "make a contribution to world peace through investment in companies producing life-supportive goods and services." The fund actively seeks out "positive" investment opportunities: Among other things, it invests in World Bank bonds to finance international development projects, and looks to put money in firms with strong fair-employment and environmental records. It will not invest in major defense contractors or weapons-related industries. It also avoids nuclear power and alcohol, tobacco and gambling industries. It does not deal with companies doing business in South Africa, except companies working to "sustain the vital needs of the majority black population" in such areas as food and health care. Largest stock holdings: Dayton Hudson, Interco, Nynex, Pfizer, Bay State Gas. WORKING ASSETS MONEY FUND As a money market fund, Working Assets differs somewhat from the other funds listed here. It buys very secure, short-term commercial and government bonds, and offers customers a safe, liquid investment, free of the risks of the stock market. The fund, which has been in operation since 1983, is considered aggressive in its application of ethical criteria to its investments. Its South African screening process, for example, is among the most comprehensive of its kind. Assets under management: $134.9 million Rate of Return (as of Dec. 13): 7.91% Investment requirements: Minimum deposit, $1000. (Offers free checking on amounts over $250, and a credit card arrangement whereby a percentage of card payments is donated to non-profits working on peace, human rights and environmental issues) Investment criteria: Seeks to offer secure accounts based on short-term debt security investments. Approximately half of the fund's assets are currently in certificates of deposit and securities of U.S. Govemment agencies or in banks, savings and loans and credit unions. The government investments are selected to emphasize support of low-income housing, higher education, small businesses, family farms and renewable energy. The banks chosen must demonstrate strong community histories. The other half of the fund's assets are in commercial paper, which must be rated highly by Moody's or Standard and Poor's. In addition, the fund will not invest in defense firms, nuclear power, "repressive regimes," firms that "support apartheid" (including through direct investment, subsidiaries, parents, or trade, licensing or franchising agreements), or firms with poor environmental and labor histories. The fund actively seeks out positive corporate investments, particularly companies with strong affirmative action programs. Interestingly, the fund does not purchase Treasury bills. On this subject, the fund's prospectus reads: "We avoid financing the federal deficit, which in our view is largely caused by wasteful military spending." Significant holdings: South Shore Bank of Chicago, Nashville Health and Education, Quaker Oats, Southwest Gas. There are other ethical funds, those described above are only a sample of the different types available. For the investor who can not find an appropriate expression of his or her personal investment agenda among them, the options narrow considerably. There are a handful of advisors and brokers who specialize in socially responsible investing, and can create accounts to more exacting specifications. But using such advisors requires a substantial amount of money. Advent Advisors, for example, handles portfolios of $100,000 and up, although the firm occasionally acts as broker for smaller transactions. And as a general rule, when you get down below $50,000 or so, portfolio managers will say that they cannot invest such an amount with enough diversity to reach what they consider a level of manageable risk. Selecting an Investment Fund IN SEARCHING OUT specialized advisors or trying to choose the "professional" investment service right for you, the best advice is to be skeptical. Fraud has been rampant in the area over the last several years and, with the growing popularity of socially responsible investment programs, analysts at some of the genuinely committed firms fear that operators with less sincere motives may be looking to cash in. Some tips: Always ask for and carefully review an investment prospectus before acting. Find out how long the advisor/fund manager has been handling socially-responsible investments. Make advisors or fund managers explain to you exactly where your money is going--if they are not knowledgeable about the kinds of screens to be applied to your investment, chances are the operation behind them is not serious about investing ethically. Ask advisors or fund managers how they determine if a particular company passes the screen. Where, for example, do they get information on companies doing business in or with South Africa? If the answer is vague or uncertain, keep looking. Find out how many clients the advisor/fund manager handles, and the average account size. If dealing with an investment advisor, find out what percentage of the advisor's clients use social screens. Also ask if the advisor's firm supports the socially- responsible investments, or if the advisor is "flying solo." Understand your financial obligations. Are the transaction fees reasonable? Do you have to keep a certain amount invested for a specific period of time? Asking these questions now can save you trouble--and money--later. Finally, get references. A reputable firm should be happy to provide you with a list of satisfied clients. But do not accept the list on faith--call at least three of the clients on it. Find out if they are pleased with the advisor's/fund's performance, responsiveness and screen criteria. A good source of additional information on this and other issues relating to ethical investment is the Social Investment Forum, a Boston-based association of investment professionals. For more information write: 711 Atlantic Ave., Boston, MA. 02111 or call: 617-423-6655.