Some investors, impatient with years of sluggish returns from US stocks, have found they can get a bigger bang for their buck in foreign markets. In addition, those who want their overseas investments to have a social impact are dipping into mutual funds geared toward socially responsible investing (SRI).
Eight funds fitting that description now have some $4.6 billion under management. Together, they have racked up a healthy 24.2 percent average annualized return for the three-year period ending March 31, according to fund-tracker Morningstar.
That figure is notable in part because the overall performance of all socially responsible funds in the United States has lagged behind that of their unscreened counterparts for the past five years, according to Morningstar data. For investors who demand strong financial returns as well as high ethical standards, this handful of SRI funds offers a ray of hope.
What's more, these funds are becoming more accessible. Five years ago, only four US companies offered SRI funds geared toward foreign equities. But fund companies based overseas are quietly opening their doors to American investors seeking ethical companies.
"If you're based in Europe, you can't distribute your prospectuses in the US unless your funds are registered there," says Mark Campanale, head of SRI business development for Henderson Global Investors, a London-based investment firm. "But if an [American] individual wants to invest in a fund in Europe, they can do so just as long as they were not marketed to. So if an individual sees something on the Internet, rings up and wants to invest in the fund, that's fine."
About 5 of every 6 of the world's 600-plus SRI funds operate overseas. Investors who go with an offshore SRI fund in some ways leave behind the usual focus of US-based SRI funds. The Henderson Industries of the Future Fund, for instance, seeks to invest in child-care providers and builders of affordable housing - two niches that SRI fund companies in the US tend not to emphasize. While most domestic SRI funds operate by screening out problematic industries, this Henderson fund includes only firms in industries deemed to have a positive influence on societies and the planet. With a 67 percent cumulative return since inception in 2002, the fund remains competitive with its American counterparts.
In looking to Europe-based funds, ethical investors uncover a separate universe of opportunity. Europe boasts some 300 SRI funds, versus only about 110 in the US. The European Social Investment Forum provides a list, along with performance statistics, at www.eurosif.org.
Investing directly in foreign funds, however, might not be for everyone. Since these funds can't legally market themselves to Americans, US-based brokers are seldom familiar with them or able to provide informed advice. That means investors need to do their homework, first to find funds that accept investment dollars from Americans (they don't have to) and second to evaluate their merits. In practice, few investors will go that distance, says Doug Wheat, director of SRI World, an information source for ethical investors in Brattleboro, Vt.
"I just don't think people will do it," Mr. Wheat says, noting that convenience is a key driver for most small-scale investors. "I mean, if you can't buy these things on Schwab or some [other brokerage] like that, people just aren't going to do it."
Fund fit for a prince
To make SRI international investing easier for Americans, Prince Albert of Monaco will launch a product especially for them in September. For a $1,000 minimum contribution, investors will gain a stake in a fund of funds, similar to a three-year-old fund now available only to Europeans. The idea: Find the best fund managers who in turn find profits in industries that inherently generate social benefits, such as natural foods, renewable energy, and water-resource development.
The fund is in the works for Americans because they have indicated a desire to broaden their influence as environmentally minded investors, says Jerome De Bontin, founder and president of Sustainability Investments LLC, a Northbrook, Ill. firm commissioned to bring Prince Albert's fund to the American market.
"We've received the phone calls" from Americans wanting to invest in the fund for Europeans, known as Monaco Environment Development Durable, Mr. De Bontin says. Those who call increasingly recognize "we're dealing with global issues and global answers. It is not possible to deal with global warming, with rising sea levels, with pollution of the air, and try to focus on a domestic company. You have to deal either with companies that have international reach or you have to deal with companies that deal with technology that can be applied worldwide."
Similar thinking produced Domini's European Social Equity Fund, the newest international SRI fund registered for marketing in the United States. The fund has delivered a 19.5 percent return for the year through April 19.
On a financial level, Europe is rife with opportunities for undervalued companies to take off in an environment that produced $400 billion worth of mergers and acquisitions in the first quarter of this year, says the fund's portfolio manager, Jeffrey MacDonagh. And on a social level, he says Europe's stiff regulations require companies to create environmentally friendly products that stand to benefit the rest of the globe. Example: Sweden-based truck manufacturer Scania invests heavily in research and development to improve fuel efficiency.
"You just don't get that kind of exposure [to environmental technologies] by investing in US stocks," Mr. MacDonagh says. "They're doing things in Europe that are, quite frankly, ahead of where US companies are at in many ways.... The fact that Europe signed on to the Kyoto Protocol has led companies to some very innovative things."
Elsewhere in the world, investors need to explore on a case-by-case basis whether a foreign-based socially responsible fund accepts American investment. Individuals concerned with pollution levels and natural-resource exploitation in Asia, for instance, can explore at least 12 Japan-based mutual funds that carry a strong environmental emphasis. For a taste of the international range, visit www.sustainable-investment.org.
Resourceful investors can find opportunities beyond conventional lists. One approach: Invest directly in foreign companies that trade on the New York Stock Exchange or Nasdaq and win accolades for their ethical policies and practices. Or, if interested in a particular foreign firm that trades on a foreign exchange, do what American opportunists have done since 1927: Sign up for an American Depository Receipt account that allows the owner to purchase shares directly in foreign companies. JP Morgan's ADR Group offers general information about how it works at www.adr.com.