The performance of socially responsible equity mutual funds has greatly lagged general stock fund performance during the past three years.
Yet the number of socially conscious funds in the marketplace has more than doubled during the same period.
Eleven of the 12 "social" stock mutual funds with three-year track records underperformed a composite of equity funds for the three years ended Sept. 30, according to Morningstar Inc., Chicago.
The same 11 funds also underperformed the Standard & Poor's 500 Stock Index.
The poor showing doesn't prove socially responsible investing produces inferior returns; rather, it seems to show the portfolio manager's ability to pick stocks is crucial. For example, a key universe of socially responsible companies - the Domini 400 Social Index - has returned a cumulative 122.95% from its May 1990 inception through Sept. 30, handily exceeding the S&P's 108.07%. It also exceeded the Russell 1000's 112.94% return, a closer benchmark because of its midcap holdings.
What's wrong? The older funds largely have been conservative, favoring dividend-paying stocks over aggressive holdings, like technology stocks, that have outperformed in recent years. And the newer funds are still flush with cash, which is not a plus in a stock market rally.
Because several mutual funds have had poor performance, "socially responsible investing is taking a bad rap," said Bill Thomason, director of portfolio investment of Parnassus Investments, San Francisco.
"They think you walk around the office with tie-dyed shirts and slippers."
Performance, however, is "more a function of the portfolio manager than the investment strategy," Mr. Thomason said.
"I'll bet if Peter Lynch started doing social investing, he'd probably have great performance."
Socially conscious funds typically avoid investing in companies that manufacture tobacco or alcoholic beverages; sell military weapons; and operate gambling casinos or nuclear power plants, all of which typically are large-cap stocks. They favor companies with positive records on the environment, employee relations and product safety.
The marketplace for "social" funds is small, but it is growing. About $162 billion is invested using social screens, of which about $12 billion is in mutual funds.
Many of the older socially responsible mutual funds have had poor track records.
The Calvert family of funds, the industry leader, "is largely responsible for these funds' reputation as being kind of blah. It has created much of the perception of the industry as a whole. They're pretty good at managing bonds but they're not a great equity house," said Laura Lallos, associate editor of Morningstar Mutual Funds, specializing in social investment funds.
Calvert Social Investment Equity fund, classified as a growth stock fund, returned a paltry compound-annualized 5.07% in the three years ended Sept. 30, according to Morningstar.
Calvert runs $4.9 billion, of which $1.4 billion is in eight socially responsible mutual funds.
Dreyfus Third Century, another veteran fund, also has had a weak track record, she said. It gained 12.32% compound-annualized in the three years ended Sept. 30; in the one-year period, however, it rose 28.62%, placing second in its peer group.
Steve Schueth, president of Calvert Distributors Inc., Bethesda, Md., and president of the Social Investment Forum, said Calvert made changes in two socially responsible funds because "we were not satisfied with the performance."
In February 1994, it switched subadvisers from United States Trust Co. to Loomis, Sayles & Co. L.P. for its Calvert Social Investment Fund Equity portfolio. Last July, it changed from a single subadviser of its Calvert Social Managed Growth balanced fund to a multimanager strategy.
U.S. Trust still runs 48% of the fund's stocks and bonds, but NCM Capital Management was added to manage of equities and Calvert Asset Management was added to manage fixed income.
Calvert Capital Accumulation Fund, a midcapitalization growth fund launched Nov. 1, 1994, is up 40% since inception, Mr. Schueth said. That fund is subadvised by Apodaca-Johnston Capital Management Inc., Fortaleza Asset Management and Brown Capital Management.
But the $180 million Calvert Strategic Growth fund, begun in May 1994, gained only 4.25% in the year ended Sept. 30, after chalking up strong returns in its first seven months.
The subadviser, Portfolio Advisory Services Inc., "got very defensive in the first quarter of 1995 (placing 65% in cash). Unfortunately (the portfolio manager) has called it wrong so far. But it's been a top selling fund in 1995, even given the poor performance," Mr. Schueth said.
Mr. Schueth noted Calvert investors view the fund as a hedge against down markets.
