Investors screen companies through a positive approach

As the Winslow fund backs off somewhat from its "pure plays," however, other funds are organizing to exploit some pure plays of their own. In January 2005, Barclays Global Investors launched the iShares KLD Select Social Index Fund, the first socially responsible exchange traded fund (ETF). Its stated purpose: "optimizing positive social and environmental criteria while seeking to reduce sector risk."

In August, Parnassus Investments unveiled the Parnassus Workplace Fund on the principle that "companies whose employees love going to work will do better than companies with poor workplaces." The fund aims to profit by bulking up on firms with "equitable pay, family-friendly benefits, training and educational opportunities," among other factors.

Not all positive screeners, however, have had much to celebrate in recent years. Since its inception in September 2003, Real Assets' Social Leaders Fund has showcased solely social and environmental pacesetters such as Timberland and United Natural Foods, but returns have measured a paltry 2.8 percent per annum. Another positive screener with an eye on clean energy sources, the New Alternatives Fund, still hasn't climbed back to its January 2001 trading price of $38 per share.

But proponents of positive screening insist that just because one screening criterion isn't paying dividends at the moment doesn't mean all positive screening is hopeless.

To the contrary, positive screening can work for anyone from a left-leaning hippie to a social conservative, says Marc J. Lane, an attorney and financial planner in Chicago. The key, he says, is to establish one specific positive screen, such as good labor relations or environmental sustainability, but not both. Then be flexible in other areas.

"Where we do run into trouble is with a client who claims to be equally committed to environmental issues and social justice issues," says Mr. Lane, who defends the positive screening strategy in his 2005 book, "Profitable Socially Responsible Investing?" "To do all that, you end up with a best-in-class approach" that selects companies with marginally acceptable records in both categories rather than exemplary marks in either one.

By making trade-offs, Lane says, a portfolio can reflect an investor's highest social value while also reaping the stabilizing benefits of diversification. The best way to set a screening criterion, he says, is to discover an investor's deepest passion and put it to work.

Others argue that positive screening works best when the criterion necessarily points to firms with a marketplace advantage. Example: Portfolio 21, a mutual fund in Portland, Ore., searches the globe for companies positioned to thrive in an anticipated era of "environmental crisis."

"By being strict with environmental criteria, perhaps you're making the business case" for the long-term profitability of firms prepared for such major problems as global warming, says Carsten Henningsen, Portfolio 21 cofounder. Having outpaced the Standard & Poor's 500 Index since inception in 1999, the Fund in Mr. Henningsen's view is vindicating its foundational theory.

Though the strategy is far from perfected, even skeptics say there's hope for positive screening. Geczy, for instance, who says investors hurt themselves when they screen out mutual funds according to social criteria, suggests they might do well by using the same screens to pick individual stocks. Here, he suggests, they can learn from their institutional counterparts.

"Institutional investors that do direct investing may in some cases [be] close to optimal portfolio allocations when they overweight according to positive screens," Geczy says. Because so many companies now meet high social standards, he says, "more than ever, you can invoke these constraints and you're not necessarily worse off" in terms of projected financial returns.

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