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Investors Putting Money Where Their Ethics Are

Socially conscious stock mutual funds attract new cash despite the rough market.

February 10, 2003|Martha Graybow | Reuters

NEW YORK — NEW YORK--Socially conscious mutual funds, which shun companies such as cigarette, beer and weapons makers, have not performed much better than traditional stock funds recently. But they are beating them in one respect: hanging on to investors.

At a time when many unhappy investors are nursing their wounds and cashing out of their stock funds, they still are putting new money into socially conscious portfolios, a small but growing area of the investment universe.

While these funds have not escaped the stock market sell-off -- nor were they immune from losses on high-profile stock meltdowns such as Enron Corp. -- they tend to attract more long-term and loyal investors than traditional funds do, industry experts say.

"I think it's just the nature of the people who are socially oriented investors," said Don Cassidy, an analyst at research firm Lipper Inc. "They probably have a longer-term view of the world than the average investor."

Overall, the 78 socially conscious stock mutual funds tracked by Lipper took in a net $1.5 billion in new cash last year, compared with an estimated $10.4 billion in net outflows from the average diversified U.S. stock fund, according to Lipper, a unit of Reuters Group.

Diversified funds invest in an array of stock sectors, ranging from health care to technology to banks, and account for about three-quarters of all U.S. stock fund assets. Socially conscious funds also invest in a varied group of stocks, but many refuse to invest in companies such as Altria Group Inc., whose Philip Morris units make Marlboro cigarettes; Anheuser-Busch Cos., the world's largest brewer; and adult magazine publisher Playboy Enterprises Inc.

Other funds pick stocks based on environmental standards, labor practices or other issues.

Mutual fund group Calvert Funds, for example, said net new sales of its socially screened funds rose about 8% last year despite the grim stock market. Overall, the fund group's socially screened investments rose to about $2.3 billion at the end of 2002, up roughly 4% from 2001 levels.

Still, socially conscious funds from Calvert, Domini Social Investments, Pax World Funds and other fund groups make up only a tiny piece of total stock fund assets under management. These funds had $16.8 billion in combined assets as of Dec. 31, compared with a massive $2 trillion in diversified stock fund assets, according to Lipper data.

The 2002 inflows -- a record for socially conscious funds, according to Lipper -- came in an especially rough year.

The average socially conscious stock fund fell 21.7% last year, compared with a 22.4% decline in U.S. diversified stock funds, according to Lipper. The socially conscious fund category includes some balanced funds that invest a portion of their assets in bonds, which have outperformed stocks during the stock sell-off.

Social funds may screen out certain stocks they deem objectionable for ethical reasons, but that does not mean returns are any better than the market at large, said Shannon Zimmerman, an analyst at research firm Morningstar Inc.

"At the end of the day, all of the same market forces that affect non-socially responsible funds affect socially responsible funds," Zimmerman said.

Certified financial planner Debra Neiman, an advocate of socially conscious investing, said she is seeing more interest from clients in these portfolios despite the rough market, in part because of the Sept. 11 terrorist attacks, which sparked concern about world issues.

"Some people don't care one way or another, but those who do care a lot," said Neiman, a principal at Neiman & Associates Financial Services in Watertown, Mass. "I've seen more people go to their employers and lobby for a socially conscious investment option" in their retirement plans, she said.

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