From SRI funds, a more sophisticated tack

Investors vote with their pocketbooks, and many are voting for better ethical, environmental, and financial behavior by corporations.

While domestic equity mutual funds posted outflows of more than $27 billion during 2002, socially responsible investing (SRI) mutual funds benefited from net inflows of more than $1.5 billion, according to Lipper Inc. And the trend continues during the first months of 2003.

"Due to the wave of recent corporate scandals, we're seeing more and more investors concerned about the companies in which they invest," says Alisa Gravitz, executive director of Co-op America, a nonprofit investor-education organization.

As a group, diversified socially responsible funds seem to perform in line with major indices such as the S&P 500, and with the vast majority of diversified equity funds. When the market goes down, most SRI funds lose money. When the market rises, most of them profit.

Some funds, however, stand out. In the race for first-quarter results, the Winslow Green Growth Fund led most of the pack with a 6 percent gain for the quarter. Analysts note both the excellent long-term returns (13 percent annualized since inception in 1994), and the potential for high volatility, (down 30 percent in the past 12 months).

Overall, 7 of 79 socially responsible equity funds posted positive returns for the first quarter, a quarter in which the S&P 500 declined by more than 3 per-cent. Over the past three years, several socially responsible funds - including the Walden Social Balanced Fund and the Walden Social Equity Fund - significantly outperformed both the broad indices and their peers.

Walden portfolio manager Bill Apfel notes that the outperformance resulted in part from reducing the funds' exposure to overpriced technology stocks prior to the tech-stock decline of the past three years and from a focus on valuations, consistency of earnings, and quality of earnings.

Some of the best three-year performances belong to the Ariel and Ariel Appreciation funds, which have generated annualized returns of 11 percent and 6 percent during the period.

Ariel Capital Management Inc., which emphasizes investment in undervalued small and medium-size companies, manages more than $9 billion under the guidance of its founder and CEO, John W. Rogers Jr.

While these two Ariel funds are down for the first quarter and the past year, the three-year outperformance has been significant.

As for the future of socially responsible funds, observers note that their investment strategies are gradually becoming more sophisticated.

In the early years of socially responsible investing, some fund managers simply ran their social, ethical, and environmental screens, and companies that made it through the screens were purchased and held without much consideration being given to the financial fundamentals of the companies or the valuations of the stocks.

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