Net Gains: Investing With Convictions Intact

Every investor wants to make a killing in the market.

What they don't have in mind is the kind of killing highlighted in a powerful television ad produced by an activist group dedicated to ending genocide in Darfur.

The ad by the Save Darfur Coalition features a financial adviser telling clients they are "really making a killing" as he displays for them a portfolio of horrific photos from the Darfur region of Sudan.

The ad, meant to pressure mutual funds to divest from oil producers and other companies doing business in Sudan, illustrates the tension that can exist between strong returns and political beliefs.

Darfur is but one issue important to certain types of investors. For others, it's the environment or labor issues. And for yet others, it is abortion, gambling or tobacco.

Increasingly, investors want their portfolios to mirror their beliefs. They do not want to campaign for clean air on one hand and invest in coal-mining companies on the other.

These types of investors want to engage in what's called socially responsible investing, or SRI. With roots in the Quakers and Methodists who refused to finance the slave trade, socially responsible investing screens out companies based on certain political or ethical criteria.

Fast-Growing Segment

By one estimate from the Social Investment Forum, socially responsible funds held about $179 billion as of 2005. That was up more than tenfold from a decade earlier, according to the organization. But still it represents a sliver of the $9 trillion overall held in mutual funds at that time.

The socially responsible investing segment includes more than 200 mutual funds, the Social Investment Forum says, and it continues to expand with the introduction of exchange traded funds geared toward this investing audience.

Typically, socially responsible investing has been associated with liberal causes, such as human rights and the environment. But it also includes religious-oriented funds, many of which feature a conservative focus. These are sometimes referred to as examples of morally responsible investing, or MRI.

The LKCM Aquinas Funds, for example, seek to promote Catholic values by following investment guidelines set by the U.S. Conference of Catholic Bishops. The Aquinas Funds screen investments for policies on issues such as abortion, contraceptives, human rights, gender and race discrimination and fair employment practices. The fund managers say they will try to influence a company's practices to reflect the bishops' guidelines, and if unsuccessful they may sell the investment.

The fund research firm Morningstar calls religious mutual funds "probably the fastest-growing subset" of socially responsible investing funds.

The largest socially responsible mutual fund is Pax World Balanced, according to Morningstar. With more than $2 billion in assets, Pax World Balanced has been a top performer this year in the moderate-allocation category, which features funds that hold a mix of stocks and bonds.

The largest socially responsible fund family is Calvert, which has more than a dozen such funds, some of which are 20 years old. Other fund families that focus on social issues include Citizens, Domini and Parnassus.

Many of the major mutual fund families also offer individual socially responsible funds. There are offerings from Vanguard, TIAA-CREF, Dreyfus and Legg Mason.

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