Socially responsible mutual funds have been around for more than 20 years, trying to keep their shareholders free from association with “vice” industries or objectionable corporate behavior. In the long run, the cost of putting your money where your morals are hasn’t been so bad. Since 1996, the average load-adjusted total return for 97 domestic stock funds that used at least one social or ethical screen to select stocks has been 7.6 percent annualized. That isn’t much less than the 7.7 percent 10-year return for the 2,230 large- or mid-cap diversified domestic stock funds that didn’t.

But lately, the gap has been much wider. Funds that have social screens trail by 0.7 percent in five-year comparisons, and by nearly 1.1 percent a year over the past three years. Have socially responsible investment funds lost their touch?


The bias effect

Part of the problem can be attributed to fund expenses. If you invest in an SRI fund, you pay 0.2 percent more per year in expenses than the average for other funds. In fact, the average expense for SRI funds is a whopping 1.66 percent.

Expenses aren’t the whole story. There are several motivations for investing in SRI funds. Each one has a sector bias, which has a big effect on the pattern of returns. Take the five funds that invest based on Islamic principles. They hold few, if any, financial-sector stocks because of proscriptions against charging interest.

The biggest block of SRI funds adhere to investment criteria that might vaguely be called liberal. Besides avoiding alcohol and tobacco stocks (a screen shared by almost all SRI funds, whether liberal or conservative), they invest to promote causes like work-force diversity, corporate community involvement, equal opportunity, clean air and water, and nonviolence. “They are naturally slanted toward some industries and away from others,” explains Bill Rocco, an SRI specialist at Morningstar. Old-line, gritty industrial businesses and extraction industries like mining, chemicals, or fossil-fuel energy seldom show up in those funds. Yet those “grit” sectors were the market prima donnas from 2003 to 2006.

The second-best-performing SRI fund over the last five years was the International Equity Fund of the Southern Baptist fund family GuideStone. Religiously conservative social screens more often reflect sensitivity to family issues like abortion and domestic-partner benefits than traditional liberal concerns. GuideStone International Equity’s two largest holdings are the petroleum giants Royal Dutch Shell and Total.


Alternative strategies

Having a strong sector bias usually means that at least one leg of the business cycle will be unfavorable to your portfolio. So what should you do when your SRI fund lags? You could consider alternative strategies that compensate for sector bias. International fund returns, for instance, are more independent of the U.S. business cycle. Besides the GuideStone fund mentioned above, Portfolio 21, with a strong green focus, has a good recent track record.

Small-cap SRI funds are worth looking into because they often perform differently than large-cap indexes like the S&P 500. Winslow Green Growth returned 16.4 percent annualized over the last five years. GuideStone Small Cap leads the list of religiously conservative small-cap funds.

Finally, the Neuberger Berman Socially Responsive Fund has had consistent success with a concentrated portfolio of about 35 stocks. It has topped the S&P 500 in each of the past six years.