Contributions C i M E F F E

Helping Clients Select SRI MutualFunds and Firmsby Natalie Chieffe. DBA, CFR\ and Karen Eifers Lahey. Ph.D.

Natalie Chie/fc, DBA. Cf P*, is an associate professor of

finance at Ohio t/niversit)i in Athens, Ohio. She is the

director of the universily's CFP registered program and

advisor for the Student ¡nvestment Group. Her research

interests lend loward investments and retirement.

Karen Filers Lahey, Ph.D,. is the Charle.'! Herberich

Professor o/Real Eslale al (he university of Akron in

Aferon. Ohio. She is co-direcWr of the CFP undergraduate

education program. Her current research areas are on

public pensions and retirement.

M any clients are interested in

buying shares in firms they

helieve are socially responsible,

based on their personal criteria. These

investments often take place through mutual

funds, but it can be difficult to accurately

classify "socially re.sponsible" funds and

determine how they differ from each other.

Do these funds support the same causes?

Should clients assume that all mutual funds

use the same definition of social responsibil-

ity? Furthermore, most investors would not

consider investing in socially responsible

investing (SRI) mutual funds unless their

returns were "at least equal to" conventional

mutual funds. Is it possible for SRI funds to

meet these expected returns with a limited

set of stocks from which to choose?

The purpose of this study is to provide

financial planners and their clients with an

explanation of the definitions, strategies,

screening criteria, and largest investments of

mutual funds that self-identify as providing

socially responsible investment opportunities.

The paper also examines the performance

Executive Summary

This study examines research onsocially responsible investing mutualfunds that includes definitions, strate-gies, and performance as a backgroundfor understanding the concept and itsinvestment applications.The definitionof SRI is a function of the individual'sor funds' viewpoint and the specific cri-teria they are willing to adopt.There isno generally accepted definition,Major strategies for SRI are screeningof stocks, shareholder advocacy, andcommunity investing.Advisors can choose from four differ-ent SRI indexes for use as benchmarks,but the indexes overlap significantly inthe firms included in the indexes, soadvisors must choose carefully.Most previous studies have found nostatistically significant differencebetween the risk-adjusted returns of

and criteria of 78 SRI funds. The picture

that emerges is one that illustrates the

complexities of choosing an appropriate

SRI mutual fund or firm that matches a

specific client's criteria.

I

History Of SRI

We examine three categories of SRI

research: definitions, strategies, and per-

SRI mutual funds when comparedthe returns of conventional funds, andour results support this finding. SRIinvestors are not sacrificing returns.The average annual return for the 78SRI ftjnds selected for this study is 4.8percent, while the return on the S&P5CX) is 2.95 percent and the return onthe Domini Social 400 Index is 2.0 per-cent For the sample period of 2001 to2006. the risk-adjusted return (RAR) onthe mutual funds is 37.3 percent theS&P 500 IS 21.2 pencent and theDomini Social 400 Index is 14.0 percentWe report the overall retums for 11 indi-vidual screens used to identify specific typesof socially responsible investing. Rnancialpla^ners can detennine which funds maybe most appnopriate for their clients basedon the specific crrtena discussed and theresults provided in this study

formance. Within the strategies category,

three additional subcategories can he identi-

fied as (1) screening, (2) shareholder advo-

cacy, and (3) community investment.

Malkiel and Quandt (1971) identified the

basic issues that were generally discus,sed

before the nomenclature of socially respon-

sible investing was developed as a specific

approach to selecting investments. They

wrote an article in the Harvard Business

6 0 Journal of Financiai Planning FEBSUABV 2009 www.FPAjournal.org

C H I E F F E L A H E Ï Contributions

Review just before the first SRI mutualfund was introduced and they framed theissues from the perspective of universityendowment funds. They stated that the pri-mary objective of a university must he aca-demic freedom, which requires that itremain neutral on investment policies andthat it is fiscally irresponsible for anendowment fund manager to accept lowerinvestment returns in an attempt toachieve social goals.

The paper is particularly interestingbecause it anticipated many of the issuesdiscussed in current articles on sociallyresponsible investing. Investors that maybe under pressure to invest based on socialgoals, according to Malkiel and Quandt,include pension fund managers, financialinstitutions, universities, churches, andcharitable organizations. They proposedthe following questions;

• Are there companies whose securitiesshould not be held in the portfolio forsocial, political, or moral reasons?

• Should the portfolio manager beguided by such considerations invoting his or her institution's stock?

• Should an investing institutionemploy any of its resources in a posi-tive manner for the sake of social,political, or moral ohjectives? (p. 38)

The first SRI mutual fund was launchedon August 10,1971, as Pax World Fund,'with $101,000 in assets. Two Methodistministers. Jack Corbett and Luther Tyson,said they had two motivations for startingthe fund: (1) provide a Rind that allows indi-viduals to invest in firms that share theirvalues, and (2) set specific standards of envi-ronmental and social responsibility that cor-porations should be challenged to live up toin their business operations. This fund isnow known as the Pax World BalancedFund. Its Web site states that it is the firstfund "to use social as well as financial crite-ria in its investment decision."

Today, an SRI industry organizationknown as the Social Investment Forum(vw^iw.socialinvest.org) states that it is a"national nonprofit membership organiza-tion promoting the concept, practice, and

growth of socially responsible investing"(2007). Its Web site indicates that from1995 to 2007 the number of SRI fundsincreased from 55 to 260, and SRI assetsgrew from $639 billion to $2.71 trillion. Inthe 36-year period from the funding of thefirst SRI fund with $101,000 to today, itwould appear that this criterion for select-ing investments has wide appeal. We nowturn our attention to SRI criteria, startingwith the effort to define SRI.

Definitions of Socialiy Responsible investing

Socially responsible investing can bedefined in a variety of ways, depending onthe viewpoint of the author. Henningsen(2002) defines SRI as investing hased on(1) choosing companies that reflectinvestors' values, (2) bringing pressure onfirms that they invest in by engaging inshareholder activism, and (3) investing inprojects that target community develop-ment initiatives. Hill, Stephens, and Smith(2003) state that investors use sociallyresponsible investing to apply their beliefsand values to firms they think use thesecharacteristics in operating their business.

In a project undertaken by the NaturalCapital Institute to describe the currentstate of socially responsible investing,Hawken (2004) identifies and examinesSRI retail funds with equity holdings. Hefinds that over 90 percent of Fortune 500firms are selected for inclusion in SRImutual fund portfolios, providing a verywide definition of the term. SRI fundspromise that an individual inve.stor'smoney will not be used to buy firms thathave distasteful products or track recordsand that firms that display environmentalresponsihility, proper governance, andsocial justice will be selected. Hawkenstates that anyone can call a fund an SRIfund and take advantage of these criteria togain a marketing edge without holding aphilosophical viewpoint.

Gay and KJaassen (2005) state thatsocially responsihie investing as a concepthas evolved over time. Screening criteriaused by fund managers have become more

qualitative and include measures on work-place conditions and sustainable businessoperations. They define SRI as "investingin companies that meet certain baselinestandards of social and environmentalresponsibility; actively engaging thosecompanies to hecome better, more respon-sible corporate citizens; and dedicating aportion of assets to community economicdevelopment." According to Kurtz (2005),SRI is "a widely used but rather impreciseterm that implies unscreened portfolios areirresponsible." In Europe, SRI refers to sus-tainable investing or green investing. Kurtzconcludes that it is a function of yourmoral views and how you, as a fiduciary,think markets work, if you follow quantita-tive factors and optimize your portfolio toa benchmark, SRI will not be "too burden-some." If you focus on a small group ofstocks, you may be negatively affected.

Debates on the definition of sociallyresponsible investing can involve thosewho view SRI based on "faith in supernatu-ral forces and those who premise it onbeliefs in political ideologies and secularphilosophies," according to Statman(2005). He discusses SRI based on politicalideologies and secular philosophies, andthat there are similarities and differencesin the two vievqioints, Firms can be viewedon a continuum with no company beingperfectly socially irresponsible or perfectlysocially responsible. When analyzingmutual funds, they can either be lenient orstrict in their criteria for SRI; but to suc-cessfully attract investors they must appealto a large and loyal enough group ofinvestors and be aware of competitionfrom other funds in terms of performanceand tracking errors.

The Social Investment Forum providesdata on funds that use SRI screens and pro-vides analysis of their performance. It definesSRI as the "process that considers the socialand environmental consequences of invest-ments, both positive and negative, within thecontext of rigorous financial analysis." Basedon the research reviewed here, it appears thatthere is no one generally accepted definitionof socially responsible investing. Rather it

www, FPAioiirnaI.org FFBRUARV 2009 Journai of Financial Pianning 61

Contributions C N I E F F E I L A H E Ï

Table 1: SRI Screens

1. Alcohol: Companies that profit from alcohol.

2. Tobacco: Companies that derive significant revenue from tobacco products.

3. Gambling: Companies that derive significant revenue from gambling enterprises.

4. Defensive weapons: Companies whose primary source of revenue is derived fromthe manufacture of weapons-related products or from defense contracts. Somefunds exclude investments in U.S. Treasury securities.

5. Animal testing: Companies that conduct unnecessary animal testing for personalcare products. Some recognize that medical products are required to undergoanimal testing in compliance with the FDA.

6. Products/services: Companies in Pharmaceuticals, biotechnology, medicaldiagnostic services, and products. Seek companies that provide eco-friendlyproducts, green technology, and organic/natural foods. Evaluate companiesbased on consumer protection and product purity. No investment in abortion,pornography, or related products.

7. Environment: Seek companies that protect and improve the environment and usenatural resources properly. Exclude major electric utilities and companies whoseprimary source of revenue is derived from nuclear generation. Avoid or limitcompanies engaged in the genetic modification of plants and animals or in theextraction of natural resources.

8. Human rights: Do not invest in companies with negative economic impact ondisadvantaged communities. Favor companies with best practices, and mayfocus on women's issues-

9. Labor relations: Seek companies not involved in sweatshop operations, forcedlabor, discrimination, unfair or unsafe labor practices, or Maquiladora operations(Mexican assembly plants that manufacture goods for export, generally ownedby non-Mexican corporations).

10. Employment/equity: Seek companies offering equal employment opportunities,with fair wages, and with safe working conditions. May choose to invest incompanies with women in management positions and strong benefits.

n. Community investments: Seek companies that direct capital to communitiesunderserved by traditional financial services, making it possible for localorganizations to provide financial services to low-income individuals andcapital for small businesses.

depends on the viewpoint of the individ-ual, the firm, or the institutional investor.

Three Key Strategies

The Social Investment Forum states thatsocial investing includes three key strategiesof screening, shareholder advocaq ,̂ andcommunity investments. It provides thefollowing definitions of the key strategies:

• Screening is the practice of evaluatinginvestment portfolios based on social,environmental, and good governancecriteria.

• Shareholder advocacy involvessocially responsihle investors who takean active role as the owners of corpo-rate America.

• Community investments direct capitalfrom investors and lenders to communi-ties that are underserved hy traditionalfinancial services institutions.

Screening

SRI mutual funds typically use screening astheir main strategy. Tahle 1 provides adescription of 11 SRI screens used hy indi-viduals and mutual funds to either includeor exclude a firm from an investment port-folio. The definitions represent our interpre-tation of these screens based on a variety ofsources including the Social InvestmentForum and individual fund prospectuses.The first three screens of alcohol, tobacco,and gambling are usually referred to as "sin

screens" from their history as early as the1800s, when churches avoided investmentin them (Henningsen 2002). Screen #6 isfor or against certain products and services.This screen is most often promoted by vari-ous religious groups.

According to Statman (2005), today'sSRI movement started in the 1960s whenthe country was in turmoil over the Viet-nam War and dealing with struggles overcivil rights, women's rights, and environ-mental policies. This led to screens foranimal testing, products and services, andthe environment. Today, different screenshave become prominent with the collapseof Enron and other issues of corporategovernance such as executive pay; laborrelations; employment; equal rightsopportunities by race, gender, and sexualpreferences; fair wages; and safe workingenvironments. Human rights, labor relations,employment/equity, and communityinvestment round out the 11 screens.

A strong correlation between corporatereputation (as defined by Fortune's list ofmost admired firms) and SRI data on cor-porate social responsibility is found byWaddock and Graves (1997). They stateihat perception of the quality of manage-ment is related to performance but not toenvironmental ratings. Russo and Fouts(1997) find tbat the environmental ratingsof the firms have a significant impact ontheir return on assets. Bello (2005) differsfrom other studies because be explicitlyanalyzes the relationship between ethicalscreening on portfolio diversification andthe variable effect of diversification oninvestment performance. He states that"not a single characteristic of sociallyresponsible mutual funds is significantlydifferent from that of conventional funds."

Statman (2006) provides a description offour different socially responsihle indexes usedas benchmarks for determining the perform-ance of SRI investments. The four indexes are(1) Domini 400 Social Index (DS400), (2) theCalvert Social Index (Calvert Index), (3) theCitizens Index, and (4) tbe U.S. portion of theDow Jones Sustainability Index (DJSI). Hefinds that the four indexes have a positive

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Contributions C i i i [ F F E I L A H E Y

correlation of greater than 90 percent, butthat they have a substantial tracking error(deviation from a bencKmark). Additionally,there is much overlap in the firms that areIncluded in each index.

The DS4Ü0 Index is produced by KLDResearch and Analysis, Inc. and excludesfirms that derive any revenue from manu-facturing alcoholic or tobacco products,gambling products or services, electric util-ities that own parts of nuclear powerplants, and firms that generate more than2 percent of sales from the production ofmilitary weapons. The index also excludesfirms that have a negative record on envi-ronment, diversity, and employee relations.

The Calvert Index excludes firms thatprofit from gambling, tobacco, and militaryweapons, but it includes firms that producealcohol, firearms, and nuclear power. Itscreens firms based on their performanceon workplace, product safety, internationalhuman rights, community relations, indige-nous people's rights, and the environment.

Citizens Index seeks firms with positiverecords on screens that include corporategovernance, human rights, diversity, envi-ronment, employee relations, and animaltesting. It excludes firms that have any inter-ests in tobacco or alcohol, lack diversity,produce power firom nuclear plants, or havea material interest in weapons or gambling.

DJSI, the fourth index, uses a differentapproach from the other three. It focuseson best-in-class selection rules that pickthe best firms in each industry in variousscreening categories.

It appears that there is significant over-lap in these four indexes as well as the vari-ous screens that have been discussed thusfar. This makes it important for financialplanners and their clients to carefiillyselect an appropriate index to use in com-paring the performance of a particular SRImutual fund performance.

Jennings and Martin (2006) suggestanother approach to the social indexing offunds. They propose using factor-basedmodels and commercial screening data toselect SRI firms to form individualizedportfolios. They discuss the problems

involved in screening individual firms andselecting funds that provide SRI because ofhigh expenses, tracking errors, and incom-plete screens.

Sharehoider Advocacy

The second strategy for those interested insocially responsible investing is share-holder advocacy. The only requirement forfiling a shareholder resolution is to own$2,000 worth of a company's stock and tohold it for at least a year. Hundreds ofthese shareholder resolutions are filed eachyear in an effort to change corporatebehavior, and they are put to a vote of allshareholders at the annual meeting. Suc-cess is measured by having three percentor more of stockholders vote for the resolu-tion based on the fact that it allows thestockholder to file another resolution onthe topic the following year.

Barber (2006) examines the use ofshareholder advocacy by state pensionfunds. He reviews the shareholder activismprograms of CalPERS, the CaliforniaEmployees' Retirement System. Since1992, the pension fund has published anannual list of companies it thinks have cur-able governance shortcomings, and Barberfinds that the day the list is announcedthere is an increase of $3.1 billion in share-holder wealth.

Community Investment

A third strategy for social investing is com-munity investment. It involves community-based financial institutions (banks, creditunions, and loan funds) that make loanssupporting local development in theUnited States and developing countries.The Community Reinvestment Act directsbanks to set aside a portion of their lendingfor small-business development and low-income housing.

Performance

Many of the SRI studies focus on perform-ance from a variety of viewpoints. We

select only a few to give a flavor of thistype of research. Hamilton, Jo, and Stat-man (1993) study 17 SRI funds and find nostatistically significant difference betweenthe risk-adjusted returns of socially respon-sible mutual funds and conventional funds.Statman (2000) analyzes the performanceof the DS400 Index and finds that it issomewhat riskier than the S&P 500 andoutperforms the S&P 500 for the period1990-1998 in both raw returns and risk-adjusted returns. He also examines a list of31 socially conscious funds, selecting onlyfunds that have no more than 30 percentin bonds and cash as defined by Morn-ingstar. He finds that the mean expenseratio is 1.5 percent, and only nine fundswere established before 1990. When Stat-man compares these funds to a matchedsample of 62 conventional funds, there isno significant difference in performance orexpense ratios.

A survey sent to investors in Earth Sanc-tuaries Limited (ESL), an Australian firmthat conserves ecosystems and breedsendangered species, finds that investorsbuy shares in the firm because of its envi-ronmental mission rather than for finan-cial considerations. The authors of thestudy, Beal and Goyen (1998), concludethat not all investors are wealth maximiz-ers. Instead, these investors demand that a"psychic utility component be included intheir returns."

Crutchley, Hudson, and Jensen (1998)provide an examination of shareholderadvocacy by examining the CalPERSannouncement of target firms and forminga portfolio of those firms on the announce-ment date. Returns are time-period spe-cific, v/ith earlier periods having higherreturns than later periods. They suggestthat aggressive activism does increa.ieshareholder wealth. Preece and Filbeck(1999) examine the question of whetherfirms identified as family-friendly earn ahigher return than firms that are not soidentified; their results indicate that thereis no difference.

The majority of papers that examine theperformance of SRI activities indicate that

6 4 J o u r n a l o f F i n a n c i a l P l a n n i n g FEERUARÏ 2009 www.FPAjournal.org

C H I E F F E i L A H E Y Contributions

there is no difference in investor returnsbetween SRI firms and conventional firms.This suggests that individuals who choose toinvest in SRI firms or mutual funds are notsacrificing investment returns. Retirementplan fiduciaries will find such data of partic-ular interest. The U.S. Department of Laborrecently updated its guidance that planfiduciaries "may never increase expenses,sacrifice investment returns, or reduce thesecurity of plan benefits in order to promotelegislative, regulatory, or public policy goalsthat have no connection to the payment ofbenefits or plan administrative expense"(DOL 2008). If pension managers are inter-ested in SRI, they will have to prove thatthey can maximize returns and considersocially responsible factors.

Data and Results

To provide a more recent test of sociallyresponsible investing, we examined theperformance and criteria used by mutualfiinds that self-identify as providing SRIopportunities. The selection of SRI mutualfijnds started on the Social InvestmentForum Web page, which listed 93 memberfunds as of June 30, 2006. We augmentedthis list of funds with the premium versionof tbe Morningstar.com Web site that listed113 SRI fiinds. We combined the two listsand examined tbem for the date of origina-tion for each fund. We eliminated thosefunds with fewer than 60 months of pricehistory, resulting in 78 funds for tbesample dataset. The period examined is tbe60 months from April 2001 to March 2006and it allows for tbe production of 59 bold-ing period returns.

Table 2 illustrates tbe distribution offiinds based on tbree different choices foreach of the 11 screens: (1) no screen, indi-cating tbat funds do not use this screen forselecting companies; (2) screen for, indi-cating tbat funds select companies tbathave a positive record on tbis screen; and(3) screen against, indicating that funds donot select companies tbat have a negativerecord on this screen.

Funds that do not use a particular screen

Table 2: Distribution of SRI Fund Screens

Alcohol

Tobacco

Gambling

Defensive Weapons

Animal Testing

Products/Services

Environment

Human Rights

Labor Relations

Equality

Community Investments

No Screen

3i

n36

30

42

24

30

35

33

36

47

Screen For

0

0

0

0

0

40

35

34

40

38

28

Screen Against

4 /

67

42

48

36

14

13

9

5

4

3

Total Funds

/ o

78

78

78

78

78

78

78

78

78

78

1

No Screen: The fund does not screen for or against this area.Screen For The fund invests in companies with positive records in this area.Screen Against: The fund bans investment in companies v/ith poor records in this area.

are most likely to appear in tbe communityinvesting category and least likely toappear in the tobacco screen. Tbe smallnumber of funds tbat do not screen fortobacco may reflect its traditional role asone of tbe "sin screens," witb tbe other twobeing alcohol and gambling. The "screenfor" column has no funds in the first fivescreens, which is intuitively logical in thatthey represent negative factors for sociallyresponsible investors. In the "screen for"column, tbe most funds (40) are in theproducts/services and labor relationsscreens. Screens "against" are used in someareas by most of tbe funds. The largest"screen against," after tobacco, is defensiveweapons (48). Relatively few funds con-sider corporate responsibility screensinvolved witb products, environment,buman rights, labor relations, equality, andcommunity investing.

Tbe religion-based fiinds tend to screenagainst certain criteria such as pornogra-phy, abortion, gambling, and alcohol. Forexample, Islamic investing is based onIslamic ethics (Shari'ab), which prohibitmoney going into companies involved inalcohol or gambling, and companies thatmake profits from interest payments, suchas banks and insurance groups. Mennoniteand other Anabaptist investors avoid

nuclear energy stocks, defense contractors,and U.S. Treasury bonds tbat supportDefense Department spending. Membersof the American Jewish community investin projects tbat promote socially responsi-ble community development and sbare-holder activism. Catholics shun enterprisestbat support abortion or contraception orprovide domestic partner benefits forunmarried or gay couples. ConservativeChristians bave a wide variety of invest-ment choices that do about the same mod-erate screening as secular organizationsoffering socially responsible funds, butthey use the profits to support Christiancommunities and values. Other fundscatering to conservative Christians avoidinvestments in enterprises their clients dis-approve of.

Most funds screen for more than one cri-terion, with a possible explanation that theyare attempting to increase their attraction toa greater number of SRI investors.

We compare tbe returns on our set ofSRI funds to tbe Standard & Poor's 500(S&P 500) Index and to the DS400 SocialIndex. We choose the S&P 500 to representthe overall universe of stocks from whichinvestors may choose. The DS400 repre-sents the universe of socially responsiblestocks from wbich we assume the SRI fund

www. FPAjournal.org FEBRUARY 2009 Journal of Financial Planning 65

Contributions C H I E F F E L A H E Y

Table 3: Average Returns and Risk-Adjusted Returns, 2001-2006

Coinpanies

Funds

Years

Average Return

Standard Deviation

Risk-Adjusted Return

Sample SRI Funds

78

5

4.8%

13.0%

Ki 37.3% . ^ H

S&P 500

50Û

5

2.95%

13.9%

21.2% . ^ i

DS400

400

5

2.0%

14.3%

^H.14.0%

Table 4: Annual Returns for Screens Used by SRI Mutual Funds,2001-2006

Screen None For

Alcohol

Tobacco

Gambling

Animal Testing

Defensive Weapons

Products/Services

Environment

Human Rights

Labor Relations

Equality

Returns

6.4%

3.2%

5.9%

5.5%

6.3%

6.6%

6.6%

6.1%

70%

6.4%

Return Returns

51.2% !

25.6%

48.2% !

50.2% !

48.5% !

52.1% !

54.1% !

50.1% !

56.8% !

53.0% !

46.5% !

Return

Community Investments 5.6%

Averages ^IB|RR^^^° 48.7% !Overall Average 4.6%

Overall Risk-AdjustedReturn 43.0%

' < -ireater than the average risk-adjusted return

3.7%

3.9%

3.6%

3.3%

3.4%

4.0%

3.7%

38.6%

372%

40.0%

379%

42.0%

45.7%

40.2%

Returns

4.0%

5.2%

4.1%

4.2%

4.1%

5,7%

3.9%

5.5%

4.4%

3.1%

3.4%

4-3%

Risk-Adjusted

Return |

416%

46.9% !

43.0% !

39.8%

43.4% !

53.4% !

47.6% !

47.6% !

30.9%

19,2%

25.6%

39.9% ¡

managers choose their holdings.

As shown in Table 3, for the sample period

the overall averc^e annual return for our

dataset of SRI funds is 4.8 percent, higher

than the 2.95 percent return on the S&P 500

Index and the 2 percent return on the DS400

Index. When risk-adjusted returns (RAR) are

calculated, the SRI funds have not taken on

an undue amount of risk. The overall risk-

adjusted return on the sample set is 37.3 per-

cent, higher than the RAR of 21.2 percent on

the S&P 500 and the RAR of 14.0 percent on

the DS400 Index. The sample of SRI fimds

has higher annual and RAR retums than both

the S&P 500 and the DS400 Index. The dif-

ferences are economically significant but not

statistically significant.

The best and worst monthly RARs for the

individual funds during the sample period

range from 43.3 percent to -4.1 percent,

demonstrating tbat all SRI funds are not

equal. But as seen in Table 4, there are no

obvious differences in the way the best and

worst funds screen for SRI criteria. The

returns for the SRI mutual funds are based

on their stated screen selections, given the

choices shown in Table 2.

Table 4 lists the return for each screen

based on a fund stating that (1) it did not

screen for one of the 11 specific criteria, (2)

it selected firms because they displayed posi-

tive criteria, or (3) it eliminated them

because they displayed negative criteria. The

two types of returns reported are the average

annual return and the risk-adjusted return,

found by dividing the annual return by the

standard deviation of returns. When the

results are examined in this way, tbe sample

funds outperform the S&P 500 and the

DS400 Index. Out of 28 returns, 17 (60 per-

cent) have RARs that match or outperform

the overall sample RAR of 43 percent. Fur-

ther, in each of the screens, except tobacco

and products, the funds that do not screen

for that criterion earn higher RARs than

those with either a "for" or "against" screen.

The only "against" screens that outperform

the average are on tobacco, defense, prod-

ucts, environment, and human rights. All

categories outperform the DS400 Index for

this period and all but one outperform the

S&P 500.

For Table 5 (on page 68), we found the

top ten holdings for each fund as provided by

Morningstar, counted how many times each

firm appeared as a top-ten holding, and cal-

culated the percentage of mutual funds hold-

ing that company. Thirty-seven companies

were on the list, with 33 of them compo-

nents of the S&P 500. Two were not on the

S&P 500 list because they are not American

firms (BP and Canon). Thirty-three were

also Fortune 500 firms and two were smaller

and appeared in the Fortune 1000 list. Thir-

teen of the companies are components of tbe

Dow Jones Industrial Average. Thus, this list

does not look markedly different from what

one would find in many non-SRl mutual

funds. This is not a surprise; smaller compa-

nies may not have the resources to be as

socially responsible or they may simply not

have the resources to prove they are. In addi-

tion, more analysts follow larger companies,

making their social performance data more

readily available to fund managers.

Our last comparison appears in Table 6

(on page 70), which shows the top ten

performing firms when no screen is

applied and when a negative screen is

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Contributions C H I E F Í E I L A H E Y

Table 5: S&P 500 Companies Frequently Listed in Top TenHoldings by SRi Funds

I Most Often Foundin Top Ten Holdings

of SR] fund5

JP Morgan Chase & Co.

Bank of America

Procter & Gamble

Johnson & Johnson

Microsoft

AT&T

Citigroup

Exxon Mobil

Pepsi

Intel

Wells Fargo

Pfizer

Goldman Sachs Group

General Electric

Chevron

Home Depot

Hewlett-Packard

Emerson Electric

Conoco Phillips

Amgen Inc.

American International Group

Verizon Communications

Lehman Brothers Holdings

FedEx

Costco Wholesale Co.

Baker Hughes Inc.

Apache Corporation

Texas Instruments

Sysco

Merck

Intuit

Colgate Palmolive

UPS

applied. The lack of difference betweenthe two comparisons illustrates the diffi-culty in identifying SRI funds. While thenegative screen includes more funds, thesame firms appear in both criteria.

Number and Percentageof Times in Our 78

Fund Sample „

18

16

14

13

12

n10

10

10

9

8

7

7

7

7

6

5

5

5

5

5

5

5

4

4

4

4

4

4

3

3

3

3

3

, S.08%

20.51%

17.95%

16.67%

15.38%

14.10%

12.82%

12.82%

12.82%

11.54%

10.26%

8.97%

8.97%

8.97%

8.97%

7.69%

6.41%

6.41%

6.41%

6.41%

6.41%

6.41%

6.41%

5.13%

5.13%

5.13%

5.13%

5.13%

5.13%

3.85%

3.85%

3.85%

3.85%

3.85%

Rankingas Fortune

ppji-^OOFirm

tí 6

17

12

24

32

48

39

8

1

61

4 9

4 6

31

41

7

4

14

11

126

6

-

9

18

62

70

28

310

299

167

68

95

-

204

44

Conclusions

This study provides a guide for financial plan-

ners and their clients who are interested in

socially responsible mutual funds but are con-

fused by the multiple offerings. We examine

the research on SRI and divide it into the cate-

gories of definitions, strategies, and perform-

ance. There are multiple definitions of socially

responsible investing. This represents the

most difficult task in choosing a fund that will

match the specific desires of a client. It is

important to carefully identify the characteris-

tics the client wants and make sure tbe fund

or ñrm fits the criteria. Of the three com-

monly used SRI strategies, screening is the

predominant method of selection.

Our sample includes 78 SRI mutual funds.

We organize them by the 11 SRI screens we

have identified. We group the funds according

to their screens to determine which ones out-

perform the average for all screens, for the

S&P 500, and for the DS400. The highest risk-

adjusted returns are earned by funds that

screen specifically against firms that profit

from tobacco and certain products, and by

fiinds that refrain from screening for or

against in the areas of products, environment,

labor relations, and community investing.

However, none of the differences is statisti-

cally significant

In this study, we ask whether SRI funds are

all the same and whether they support the

same causes. We found that tiiey state their

purposes in several different ways, which

would lead investors to expect differences in

returns. The managers of these funds want to

outperform other funds. This leads them to

select the largest and strongest companies that

comply with their criteria, and tends to make

their universe of companies very similar.

The unique contribution of this study is its

explanation of the various definitions of SRI

and the confirmation ofthe lack of difference

in risk and return for SRI funds when com-

pared with non-SRI funds. The real difficulty

that financial planners and their clients face is

deciding which firms or funds match their

personal social screening criteria. Each client

should decide which of these areas they find

most important and then choose funds that

screen in those areas. Of course, the usual

caveats concerning mutual fund fees and

expenses apply.

m68 Journal of Financial Planning \ FEBI!IIABY2009 www.FPAjournal.org

Contributions C H I E F F E I L A H E Y

Table 6: Incidence of the Same Large Companies Appearing

AlcoholNo Screen

31 Funds

AT&T (3)

Bank of America (4)

Cisco (5)

Citigroup (5)

Exxon Mobile (6)

General Electric (5)

Johnson & Johnson (3)

Microsoft (4)

Pep5i C3)

Procters Gamble <4)

Negative Screen47 Funds

AT&T (7)

Bank of America (10)

BP(7)

Cisco (13)

Intel(7)

Johnson & Johnson (9)

JP Morgan Chase (14)

Microsoft (7)

Pepsi (6)

Procters Gamble (9)

îjng Different Screens

Tobacco a j ^ l

11 Funds

Bank of America (3)

Chevron (3)

Citigroup (2)

Exxon Mobile (3)

General Electric (2)

IBM (2)

Johnson & Johnson (2)

JP Morgan Chase (2)

Microsoft (2)

Procters Gamble (3)

67 Funds

ATST C9)

Bank of America (11)

Cisco (17)

Citigroup (8)

Exxon Mobile (7)

Johnson S Johnson (10)

JP Morgan Chase (14)

Microsoft (9)

Pepsi (7)

Procter S Gamble (10)

[WK Gambling

36 Funds

AT&T (5)

Bank of America (8)

Chevron (5)

Cisco (6)

Citigroup (8)

Emerson Electric (7)

Exxon Mobile (8)

General Electric (7)

Hewlett-Packard (4)

Microsoft (5)

in

J

42 Funds

AT&T (5)

Bank of America (6)

BP(6)

Cisco (12)

Intel (7)

Johnson & Johnson(9)

JP Morgan Chase (12)

Microsoft (6)

Pepsi (5)

Procter & Gamble (9)

Endnote

1. www.paxworld.com/02_history.html.

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