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January 15, 2004
SRI Domestic Equity Funds Edged Out By Their Non-SRI Counterparts in 2003
    by William Baue

Socially responsible investment domestic equity mutual funds slightly lagged their non-SRI counterparts, while the Calvert Social Index outpaced the S&P 500 for the year.


In 2003, socially responsible investment (SRI) domestic equity mutual funds slightly underperformed all other non-SRI domestic equity mutual funds, according to Lipper, a Reuters-owned firm that tracks 80,000 mutual funds worldwide.

Lipper tracks an overall universe of 3,857 equity funds with a total of 10,080 classes. SRI accounts for 74 equity funds with a total of 147 classes, and non-SRI accounts for 3,783 equity funds with a total of 9,833 classes. Comparing apples-to-apples between the two universes requires some careful parameter-setting.

"It is always virtually impossible to do a fair one-to-one comparison of the SRI funds universe versus the rest of the equity universe since the mix of funds is not the same," said Don Cassidy, senior research analyst in Lipper's Denver office. "One thing we felt especially necessary for 2003, to address the relative-mix issue, was to separate out the domestic versus world-equity funds, since SRI has a fairly small component of the latter."

The 67 SRI domestic equity funds with 127 classes generated average returns of 27.89 percent from December 31, 2002 through December 31, 2003, according to Lipper. The 3150 non-SRI domestic equity funds with 8,120 classes generated average returns of 29.49 percent during the same time period, Lipper calculations indicated.

"Looking at the domestic universe, it appears that non-SRI funds nosed out SRI funds for the year," Mr. Cassidy told SocialFunds.com.

Looking at the story behind the numbers, non-SRI funds benefited from strong performance by energy and extractive industries: natural resources equities generated returns of 32.84 percent, and gold equities rose 58.33 percent, according to Mr. Cassidy. Some SRI funds limit their exposure to these sectors, and thus missed out on this boon.

Such was the case with the Domini 400 Social Index (DSI), which has outperformed the S&P 500 on a risk-adjusted basis since its 1990 inception. The S&P 500 generated a total 2003 return (dividends reinvested) of 28.66 percent while the DSI posted a 28.47 percent return.

"One of the factors that hurt the DS 400 Index performance relative to the S&P was its industry exposure, and specifically its relative underweight in the drug, energy, and oil refining industries and its overweight in the telephone industry," said Kyle Johnson, director of institutional sales for Domini Social Investments, which licenses the index.

However, other factors may have counterbalanced this effect on SRI in other instances.

"There may also have been a small-cap effect working in favor of SRI equity funds-- small-cap stocks did vastly better than large-cap ones in 2003, by about 20 percent!" said Mr. Cassidy. "So this may have contributed to SRI doing well despite the handicaps of underweighting the energy and extractive energy sectors."

The Calvert Social Index (CALVIN) benefited from this effect, generating a total 2003 return (dividends reinvested) of 30.85 percent to outpace the S&P 500.

"CALVIN's positive performance characteristics are due to its exposure to small-cap stocks, high market sensitivity, and high relative weighting in the tech sector," said Elizabeth Laurienzo, director of corporate communications at the Calvert Group.

Looking at world-equity (WE) funds reveals some limitations in SRI performance. The 7 SRI world-equity funds with 20 classes tracked by Lipper generated returns of 27.95 percent in 2003, while the remaining 633 WE funds with 1,713 classes tracked by Lipper garnered returns of 38.93 percent.

"While domestic returns were in the same ballpark, the SRI world-equity funds underperformed their broader universe by about 11.6 percent--a huge difference," said Mr. Cassidy.

He ascribed this discrepancy to SRI's worldwide research resources, which pale in comparison to larger non-SRI firms, as well as to SRI fund class weightings.

"All of the WE SRI funds generating full-2003 returns were classified as either Global (GL) or International (IF), whereas over 560 of the funds/classes in the larger WE universe focused on areas that happened to do better than GL and IF in 2003: global or international small-cap, emerging markets, and less-developed regions and specific countries such as China and Japan," Mr. Cassidy explained.

Looking at specific domestic SRI funds, Mr. Cassidy found common strategies amongst the top performers tracked by Lipper in 2003.

"Their success seems to be mainly a case of good industry and sector selection, and in some cases specific stock selection," said Mr. Cassidy.

The top two performers, the Winslow Green Growth Fund (WGGFX; 91.74 percent) and the Green Century Balanced Fund (GCBLX; 63.47 percent), share Jack Robinson of Winslow Management Company as their portfolio manager.

"For example, one of the largest stocks in these funds, PolyMedica (PLMD), was up 75 to 80 percent in 2003, so that sure helped," said Mr. Cassidy. "In the other cases, it looks like overweighting in technology and in parts of healthcare helped."

The Citizens Small-Cap Core Growth Fund (CSCSX; 39.21 percent) and the Calvert Large Cap Growth Fund (CLGAX; 38.24 percent) were both heavily weighted in electronic technology and health technology.

"Overall, tech was a huge winner--and a domestic leader--in 2003," stated Mr. Cassidy.

 

 
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