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June 02, 2006
Socially responsible fund gets responsible
Back in the 1990s, when I was a mere cub mutual fund reporter, I was assigned the task of covering socially responsible investing. My mandate was to break news on the world of funds that tries to make money for investors while doing good for the world. One of my early sources was Amy Domini--we met at the SRI in the Rockies conference in Jackson, Wyoming.
Domini is a pioneer in the SRI field. She's the co-founder of the Domini Social Equity Index, which is a kindler, gentler version of the S&P 500. It screens out polluters, companies that are bad to workers, and the like. Domini also runs a mutual fund company whose flagship fund tracks the index. The index (and, by virtue, the fund) did amazingly well in the late 1990s, but lately performance has been subpar.
Now Domini is asking shareholders to change the way the fund is managed, and it's attracted some attention. (In case you missed my breaking news story this week with more analysis, here's the link.) Domini wants to switch to a quant style that will be run by Wellington Management.
I think it's refreshing to see fund companies that are willing to shake up the system. In fact, just this week, Matthews Funds decided to close its popular Matthews Pacific Tiger Fund to new investors on June 8 to keep hot money from flowing into the fund.
Do you think fund companies are doing enough to look out for shareholders?
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I heard Amy Domini speak recently. She mentioned that it's hard for SRI funds to perform well when sectors like energy are leading performance.
So would Wellington overweight energy, even if there aren't many socially responsible firms in that sector? Did Domini explain how Wellington would give the fund an edge?
Posted by: Susan Weiner at June 3, 2006 12:46 PM
Amy says: "The oil industry has been killing us." Just 3.3% of the fund is invested in energy stocks.
While she didn't get into the nitty gritty differences, she said Wellington's quant model uses 65 selection factors, with a half value/half growth model. As a result, turnover is higher, so I have to assume that the quant will stick with energy names that have some momentum, and dump the ones that it hates. (When you track an index that is rebalanced on a fixed schedule, you can't just jump in and out of stocks.)
Posted by: Lauren at June 5, 2006 08:03 AM
Thanks for your reply!
Posted by: susan weiner at June 5, 2006 11:57 AM
I am a long-term mutual fund investor, Internet entrepreneur, and consider myself a socially responsible individual.
I want to invest in funds like Domini's. Her 5 & 10 year index fund - trailing total return - per Morningstar, has underperformed the S&P 500 by -1.27 and -.88, respectively. Since she is quoted as the "standard", I find this discouraging.
Why? I am sure there are micro, macro, and organizational reasons many. Nevertheless, I can't help but come back to her website and ask this very important question (quote from Domini Website): "To answer the question of whether social screening carries an inherent financial "cost"". It seems to me the answer is a resounding yes (in the current economic time).
My questions to you Lauren are these: is the issue the metrics of the screens? Or is it free-market capitalism and the inherent exploitation and privileges commensurate? Silly question or is the disease staring us in the face? Is it market inefficiencies? Is it perhaps a painfully challenging answer as to whether or not we can make money in our current times without exploiting the environment, people (or something else)?
Does the S&P 500 inherently not recognize these costs/price, and thus overstate profits/earnings (by perhaps passing the unrecognized cost to someone or something else in the process)?
What, exactly, do the numbers tell us after 10 years?
Posted by: Erik Fowler at October 9, 2006 11:05 PM