Socially Screened Index Funds Top S&P 500
BOSTON — Index funds enjoy top rank among socially responsible investments, as they do in the broader mutual fund universe these days.
Instead of trying to beat the market, these funds try to match an index - in this case, indexes created in-house or by a research firm to screen companies based partly on social criteria.
The Citizens Index Portfolio is up 20.3 percent so far this year through June 23, ahead of the Standard & Poor's 500 stock index at 18.6 percent.
The Domini Social Equity Index Fund, up 20.9 percent this year, recently ranked as the top growth-and-income fund over five years, according to Morningstar, the Chicago firm that tracks mutual-fund performance.
Growth-and-income funds invest in the stock shares of large companies that pay dividends to shareholders.
Fund president Amy Domini doesn't see the strong performance as a fluke.
"The screening eliminates a lot of lower financial quality companies," such as ones facing liability lawsuits, she says.
The stocks in these funds are weighted by company size. So in the Domini fund, 42 percent of investors' money goes into 20 big companies such as Coca-Cola, Intel, Microsoft, and Merck, even though the Domini index includes 400 corporations. Because these are also big companies in the S&P 500, the indexes track the S&P fairly well.
Both Citizens and Domini use complex "social audits" to screen companies. Domini, for example, asks 140 questions.
But the two funds also differ.
Citizens wins a slightly higher social rating from Franklin Research & Development (see chart).
"We have a much stronger focus on the environment," says Sophia Collier, president of Citizens Trust, citing the absence of oil and mining stocks.
Morningstar prefers Domini because of its lower management fees.
At Citizens, "expenses have come down to 1.59 percent" of fund assets this year, says Ms. Collier, who took over there after founding the Soho brand of fruit soda in the 1980s.
She aims to bring the expense ratio down to 1 percent, more in line with the industry average, but says social screening adds costs.
Both funds aim to influence firms by communicating with executives and voting shares at annual meetings.
They occasionally remove companies from their indexes. "Our focus is financial performance," Ms. Collier says, but there are "social" exceptions. Columbia HCA's cost-cutting at hospitals, for example, proved too aggressive to pass muster, and Citizens dropped it.