Why socially responsible funds are behind this month

Ethical investors usually do about as well as traditional investors, research shows. But that's not the case this year. The Domini Social 400, the best-known index of socially responsible firms, has fallen about 2 percent, much more than the Standard & Poor's 500 Index, which is virtually even for the year. There's a reason, says Eric Packer, Boston-based investment adviser with Progressive Asset Management, the socially responsible division of Financial West Group. Here are excerpts of his comments:

Mr. Packer: We're looking at some really major problems in the economy. We're looking at the shock of oil prices. We're looking at consumers who've been concerned about a lot of the prices for their food, their energy. And also there's a little bit of concern about not knowing where interest rates are going.

EP: One of the problems is that the energy area is underrepresented in the Domini. And it's also not in tobacco. There was a recent change in the [federal government's] tobacco litigation, where it was originally [asking] $130 billion. It looks like they may be settling for $14 billion. So it's been a very good last few months for tobacco.

EP: If you take a look at the longer-term performance of the Domini, a three-year and a five-year period, you're looking at pretty much parity. In fact, there are certain periods of time where the Domini has slightly outperformed the S&P 500. We believe if you have that long-term perspective ... we feel they're going to have further parity.

EP: That's a fairly new phenomenon. Historically in social funds, you had something called avoidance. There were problematic areas - it could be energy, it could be defense contractors, it could be consumer products. But what we're finding now is that there are certain areas, particularly energy, where some social fund [managers] feel they can use a best-of-class approach.

EP: It's somewhat gray. Here's a way you can include a problematic area in your portfolio but feel you're investing in a best-of-class company [that's not in a great industry but at least operates more responsibly than its competitors].

EP: Sometimes, we'll have clients who say 'I want to really feel the companies I'm investing in are making a difference. Avoidance isn't enough. I want my companies to be more proactive.' One fund particularly that we think is exciting is New Alternatives.

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