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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

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 way 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

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 revitalization efforts."


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