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| Features, February 2001 |
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| Can US SRI funds shrug off a rocky year? |
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| Over-exposure to technology stocks hit US socially responsible investment funds hard last year. Ricardo Bayon asks what their underperformance means for the sector |
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 Last year was a far-from banner year for equity investors, almost regardless of the market they invested in. The US benchmark, the S&P 500, ended the year down 9.11%. Meanwhile, some of the largest and most prestigious SRIs performed worse than the index for the first time in many years. For example, the $1.8 billion Domini Social Equity Fund shed 15% last year. The Pax World Growth fund - with $1.23 billion under management - was down 16.11%. And the $547 million Citizens Core Growth Fund lost a fifth of its value. And it wasn't just individual funds that took a beating: the sector as a whole did much worse than in previous years. Morningstar, the leading mutual fund analyst in the US, noted that through August of 2000, nine out of the 68 SRI funds it has on its database (or 13%) received 5-star ratings (the highest offered by the firm). That compares to 10% for the entire mutual fund universe. While this is good news, it is also drastic downturn from the year before. Then, 21% of the SRI funds with track records of three years or more received 5-star ratings. The decline of SRIs is no mystery. According to Catherine Hickey, SRI analyst at Morningstar, the poor performance of SRIs was tied to their over-exposure to tech stocks, which took a battering in 2000. To make matters worse, she adds that most SRIs avoid energy and oil stocks which had a stellar year in 2000 on the back of rocketing oil prices: "These two factors cost the industry dearly and, partly as a result, funds like Domini and Citizens had bottom quartile years in 2000." Still, it has not all been bad news for the SRI industry. Some funds particularly smaller and more aggressive funds such as such as the $48.3 million New Alternatives fund (managed by a father and son team) and Green Century's $73.2 million Balanced fund dramatically outperformed the market - up 51.76% and 13.24% respectively. Both funds benefited from large holdings in alternative energy companies, some of which had treble-digit returns in 2000. In the case of the Green Century fund, they were also heavily invested in biotechnology, the year's top performing industry. Jack Robinson, manager of Green Century's Balanced Fund, explains that, unlike many SRIs, the Green Century fund is solely concerned with companies that are environmentally sensitive and proactive. As a result, they naturally gravitated towards companies like Vestas (wind energy) Fuelcell energy (fuel cells), and Astropower (solar energy), all of which did extremely well last year. Interestingly enough, Green Century was not heavily exposed to the traditional technology companies. According to Robinson, companies like Intel don't pass the fund's environmental screens ("too polluting") and Microsoft "is not particularly green." So, will last year's hiccup hit investment flows into SRI? Some managers are already seeing signs of a downturn. Paul Hilton, who manages the $1.18 billion Third Century Fund at Dreyfus (down 12.9% last year) says that "although the total number coming into social investing between 1996 and 2000 has grown, I think we saw a bit less come in last year. It will be interesting to see if the growth of SRI is truly a sustained trend." Hilton says the biggest reason for growth in past years is the growing availability of SRI options in retirement vehicles (such as 401(k) retirement funds in the US). And this is a trend is continuing. Amy Domini, President of Domini Social Investments (the company which manages one of the Domini Social Equity Fund), notes that more than one-third of 401(k)s in the US offer a social choice, and points out that Ford recently announced that it would offer the Domini Social Equity Fund to its staff as a 401(k) option. Frank Coleman, vice-president of socially responsible investing at Christian Brothers Investment Service (CBIS) in New York sees a number of other trends at work. "For one," he says, "I think we are seeing a growing number of people interested in integrating their faith, beliefs, morals, and values across all aspects of their lives, including investing." He also points to the increasing affluence of women, and their increased involvement in investing. "For some reason, women seem to be more interested in exploring SRI options than are men." The importance of women is echoed by a number of other SRI managers, including Linda Descano, who is in charge of the Social Awareness Investment Programme at Salomon Smith Barney. However, she feels that the growth of SRI is also the result of the so-called "wealth effect" of the last ten years. She argues that as people become more prosperous, they put more of an emphasis on quality of life and on achieving a confluence between their behaviour and their values. So how would an economic downturn in the US hit the sector? On the one hand, people like John Blanchard, vice-president of Social Policy at the Maryland-based Calvert Group doesn't think a recession will have much of an effect on the SRI industry. He says that many SRIs now have sufficiently good and consistent track records that inventors have confidence in their long-term prospects. Hickey at Morningstar, agrees. She says that people used to think that they had to give up on returns in order to invest in socially responsible ways, but that the strong performance of SRIs over the past five years have proven otherwise. On the other hand, there are those who believe that last years performance will discourage new investors from experimenting with SRI options in their portfolios. Meanwhile, Hickey does believe that SRIs will need to re-consider their high exposures to sectors such as technology. She says that although technology stocks tend to pass the social and environmental screens more easily than other stocks, and that over-exposure has served SRIs well in the recent tech boom, a year like 2000 shows that such strategies can cost SRI funds dearly. She feels that managers and investors will need to give some serious thought to increasing the diversification of their portfolios. |
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