How fare those funds that let social conscience be their guide

One of the enticements of a mutual fund is the promise that, while the shareholder watches from the sidelines, a fund manager will be investing his money in a smorgasbord of profitable enterprises.

For some investors, however, this raises a troubling question. The fund managers, it is hoped, know which investments will be profitable and which will not. But do they share the investor's moral concerns?

Investors who feel morally opposed to the production of armaments, alcohol, or tobacco, or concerned about unsafe working conditions or unfair hiring practices, worry that they may be unwittingly financing companies involved in just such such operations. Simply scanning the list of stocks included in a mutual fund's portfolio does not tell an investor exactly what each company's holdings are, or under what conditions that company operates.

In an attempt to provide a market for investors with such concerns, a handful of "socially conscious" mutual funds have been created over the years.

Generally these are conservative funds with slow growth rates. Says one investment specialist of the socially conscious funds, "There aren't too many of them, and they've never been particularly popular. What they say, in effect, is , 'I'll turn my back on greater profits if it means doing something against my conscience.'"

The stricter the investment criteria of a socially conscious fund, the narrower its field of investment. But whether this is a genuine handicap for their investment managers is hard to measure, as the performance of these funds varies widely.

At one end of the scale is a fund like Pax World, which only invests in companies that meet the fund's stringent standards. Pax World is a small fund, with net assets of a little over $3.6 million.

Pax World avoids the alcohol, tobacco, and gambling industries. It will not invest in companies that are contractors with the Department of Defense. It considers comapny employment practices, working conditions, and pollution controls. There are now about 30 companies in the Pax World portfolio. Turnover among these 30 is very low.

Turnover is also low among Pax World shareholders. Contrary to the experience of most mutual funds, Pax World finds that its investors are very loyal. "They want us to succeed," explains Luther E. Tyson, president of the 10 -year-old fund.

Mr. Tyson admists that Pax World is not the fund for investors who "want to get rich overnight," but adds that it does attract those interested in a "social dividend."

In addition to investing money in what it considers to be a moral fashion, Pax World also hopes to promote what fund vice-president J. Elliot Corbutt calls "corporate responsibility" among the investment community. The theory is that when companies learn that investors are asking about their hiring practices, working conditions, and other activities normally considered peripheral to investor concerns, these companies may work harder to keep standards high.

The Dreyfus Third Century Fund, established in 1972, is a much larger fund, with total assets of about $100 millin and about 50 companies in its portfolio. the fund seeks to invest in better-performing companies that meet its requirements in four areas: equal- opportunity employment practices; occupational safety and health standards; pollution control; and product purity and safety.

Jeffrey Friedman, president of the Third Century Fund, feels that the ethical criteria his fund applies help to turn up some very good investment, because "a company that can deal with these problems creatively can bring that same creativity to other problems."

Third Century also requires that about one-third of the companies in its portfolio turn out a product that makes what the fund managers consider "an important contribution to the quality of life."

Of late, Third Century's performance has been strong. For the 12 months ending Nov. 28, the fund can boast a 53.1 percent increase in price per share. Forbes magazine, in its 1980 Annual Mutual Fund Survey, gives it a good performance rating.

"No one's going into it as a charity," Mr. Friedman says. In fact, he points out, many of the fund's current investors may not even be aware of the fund's social criteria. They're simply in it to make a profit.

Foursquare, a socially conscious fund begun in 1962, will not invest in companies involved in alcohol, tobacco, or drugs. Like Pax World and Third Century, Foursquare is a conservative fund with an eye toward long- range gains rather than overnight profits.

Foursquare's performance has not been impressive, although it has improved in recent years.

The Pioneer Fund, which has been in operation since 1928, has an unwritten policy of trying not to invest in tobacco or liquor stocks, although fund managers do no close screening, and as the fund's treasurer, Albert Runge, admits, "It's hard to know with large corporations" exactly what their varied businesses include.

Mr. Runge says Pioneer's investment tactic has been to buy up stock in companies that have been to buy up stock in companies that have been overlooked by the market or are out of favor with investors and then hang on, hoping for long-range gains.

Pioneer's performance has been strong. Its net assets stand at about $1 billion, and its average annual total return from 1968 to 1980 is well above the Standard & Poor's 500 stock average. Forbes, in its 1980 Annual Mutual Fund Survey, ranks Pioneer among 19 funds it considers "the cream of the crop."

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