General Mills shares have had a terrific run, nearly tripling in price since 1987. But the Reverend M. Paige Bowman wants nothing to do with them. The company has contributed money to Planned Parenthood, which supports abortion, and that goes against Bowman's Southern Baptist beliefs. "If I am going to speak out for the pro-life movement, I want to invest that way," says Bowman, pastor at Ramoth Baptist Church in Stafford, Va.
Instead, Bowman is putting his retirement money into the Timothy Plan, a mutual fund that screens out companies whose activities conflict with fundamentalist Christian values. The fund's total return this year through Aug. 15 was 15.39%--below the 23.01% of the Standard & Poor's 500-stock index. But Bowman says high returns were not his goal in choosing the fund: "I looked at it from an ethics point of view."
SCRUPLES. Socially responsible investing, which for nearly two decades has been typified by funds that promote a mix of liberal ideals, is taking a turn toward more custom-tailored investing. Faced with more clients who insist on putting their scruples above returns, money managers have created funds that address specific moral, ethical, and religious issues. The question is whether these new-style funds can yield better results than their established brethren have achieved.
Until recently, backers of gay rights would have been led to several established funds--Domini Social Equity, Calvert Social Equity, and Dreyfus Third Century, to name a few--that screen out companies with discriminatory practices, as well as those that promote tobacco and alcohol use or cause pollution. But what about investors who feel strongly that homosexual workers should be treated fairly but aren't interested in campaigns against smoking and drinking? The Meyers Pride Value Fund picks only companies with policies against discrimination on the basis of sexual orientation. Started in June, 1996, it has nearly matched the S&P 500's performance this year.
On the other end of the spectrum, fundamentalist Christians have found most socially responsible funds to be at odds with their view that homosexuality is morally wrong. So the Timothy Plan, founded in 1994 by Art Ally in Orlando, Fla., avoids companies that offer health benefits to workers' gay partners. It also screens out companies that profit from abortions or produce violent or sexually explicit TV shows and films.
Christian Scientists began a fund in March that's consistent with their practice of eschewing medical treatment. The American Trust Allegiance Fund avoids drug and hospital concerns as well as tobacco, liquor, and gaming companies. Returns through Aug. 15 were 14.6%. The Amana Growth and Income funds invest according to Islamic principles, shunning mainstream financial institutions because Muslims believe collecting interest is wrong.
The Social Investment Forum, based in Washington, estimates that about $635 billion is currently in select stocks and other investments tailored to reflect moral and social beliefs. A small fraction--just $4 billion--is in socially responsible mutual funds, but that's double the amount of two years ago. While many of these funds have less than $100 million in assets and are not tracked by established industry watchers, investors can get access to monthly performance updates for 36 of them at the Social Investment Forum's Web site, www.socialinvest.org.
The ongoing struggle for all socially responsible fund managers is proving that investors who follow their conscience can still make money. "I'm unwilling to admit you will underperform because you invest in your beliefs," says John Clark, who founded the Guardian Investments brokerage firm in Front Royal, Va., with James Kelly two years ago. Guardian works with anti-abortion investors.
Nevertheless, the overall track record for socially responsible funds is lackluster. Chicago-based Morningstar Inc. tracks 17 of these funds with records dating back at least five years. Only five show returns in the top half of funds in their categories--be they equity growth, income, or small cap. Two of the five, including Domini Social Equity, are in the top quarter. Three-year records show much the same result. Of 41 funds, 14 rank in the top half of their categories, while seven fall in the top quarter. Liberal funds are no more likely to underperform the market than funds based on religious principles.
Some new funds have had a rocky time. The Timothy Plan grossly lagged other mid-cap value funds in its first three years. Founder Ally blames the original money-management firm, whose other funds not based on Christian investment criteria also did poorly.
Since Awad & Associates in New York took over the management in January, results have picked up. Chairman James Awad says he can apply to the Timothy Plan his firm's standard stock-picking criteria--including buying small-cap companies with below-market price-earnings ratios, excess cash flows, and high insider stock ownership. Only once has a company Awad wanted to buy been rejected because it didn't meet the fund's Christian code.
By picking large undervalued companies with some significant event that might boost shares, Shelly Meyers, chairman of Meyers Capital Management in Beverly Hills, Calif., has almost matched the S&P 500 with her gay rights fund. "The value has to be there first and foremost," she says. "We really stick to our discipline on this."
For conscience-driven investors who want to go beyond the small, often untested funds, some brokerages are getting into socially responsible screening. A few are using software from the Institute for American Values Investing in Redmond, Wash., that gives red, yellow, or green lights to indicate companies' adherence to conservative Christian principles.
For example, in March EFP Inc. in Jackson, Miss. packaged existing funds that fit the conservative Christian beliefs of its clients. Its VIP 100 Portfolio includes major fund offerings, such as Oppenheimer Growth and Putnam International Growth. EFP looks for funds with strong track records and low turnover rates (to avoid the problem of new companies that violate Christian principles coming into the funds).
CLIENTS' CLAMOR. Big brokerages have steered clear of socially responsible funds. But in February, Greenwich Street Advisors, Smith Barney's in-house money-management firm, converted a $380 million fund into the liberal-leaning Concert Social Awareness Fund (800 327-6748, ext. 478). Like other socially responsible funds, Concert screens out polluters and producers of tobacco, weapons, and nuclear power. It adds companies that have programs to help workers, their communities, or the environment. Since the conversion, it has returned 8.82%.
Greenwich was already managing about $400 million in assets for clients who asked that certain kinds of companies be screened out. But demand for specialized mutual funds is growing, says Robert Brady, managing director of the Concert fund. "We really think our investment issues and our social issues are converging here," he says. Now managers such as Brady must show that this convergence can produce respectable returns.