August 06, 2003
Domini Social Bond Fund Supports Community Development Financial Institutions
by William Baue
The Domini Social Bond Fund allocates almost seven percent of its assets to CDFIs while also
performing like a classic intermediate-term bond fund.
Three years ago, Domini Social Investments set
out to meet what it felt was an unmet market need: a mutual fund that supports community
development financial institutions (CDFIs), which focus on communities that are underserved by
traditional banks. The challenge was to support CDFIs in different regions (both urban and rural),
for different purposes (such as housing or business), serving different constituents (including
Native Americans and women, among many others).
"A bond fund seemed to be the way
to bring it all together," said Amy Domini, founder and CEO of Domini Social Investments, which
launched the Domini Social Bond Fund
(ticker: DSBFX) in June 2000.
"The bond fund was created in order to make it easier for
the classic investor to actually support community development financial institutions, which is a
pretty cumbersome process if you're trying to a) find these CDFIs, and b) make a decision as to
which of these you want to support," Ms. Domini told SocialFunds.com.
Toward that end,
Domini chose Chicago-based ShoreBank, the nation's oldest and largest CDFI, to
submanage the DSBF, making it the first mutual fund to be submanaged by a CDFI. ShoreBank
identifies appropriate CDFIs throughout the country for the DSBF to invest in.
the process works is that ShoreBank proposes a particular investment in a CDFI to something called
the Fair Value Committee, which has three representatives from Domini," said Steve Lydenberg,
Domini's chief investment officer, who chairs this committee. "We then review the proposal and
make a final decision."
While the Social Investment Forum (SIF) urges its members to allocate
one percent of their
managed assets to community investment, the DSBF currently allocates 6.6 percent of its assets, or
$3.3 million, evenly across 27 different
CDFIs, according to Mr. Lydenburg.
"Most of the investments are in insured $100,000
certificates of deposit, with a couple of them--University Bank in Minneapolis and Self-Help Credit Union--holding additional deposits in money
market accounts," Mr. Lydenburg told SocialFunds.com.
Durham, North Carolina-based
Self-Help Credit Union exemplifies the work done by CDFIs. Since 1994, this CDFI has bought almost
50 rundown mill houses, converted them from two- to one-family homes, completely renovated them
from top to bottom, and then sold at affordable prices to low- and moderate-income first-time
homebuyers. Since 1980, Self-Help, which currently has $90 million in assets, has provided over
$1.78 billion in financing to 25,800 homebuyers, small businesses, and nonprofit organizations.
"Generally, these CDFI investments earn a market-rate return, which varies from
time-to-time and region-to-region," said Mr. Lydenburg.
The bond fund as a whole has
earned returns of 7.52 percent over the past year ending June 30, 2003, according to data provided
by Thomson Financial Network. Three year annualized returns amount to 9.09 percent.
"We've been able to construct something that feels to most investors like a classic
intermediate-term bond fund, and yet we've been able to support a great many community development
financial institutions," said Ms. Domini.
As with most other socially responsible
investment (SRI) bond funds, the DSBF also invests in U.S. government agencies while avoiding
investment in U.S. Treasury bonds, which help finance the military.
"The Fund invests in
mortgage-backed securities issued by institutions like Fannie Mae (FNM), Freddie Mac (FRE), and Ginnie Mae,
which play a vital role in providing liquidity in the secondary mortgage market for affordable
housing," said Mr. Lydenburg. "The Fund also invests in bonds issued by corporations that have
strong social stories, and in bonds issued by states and municipalities for a variety of