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January 16, 2004
Gazing in the Crystal Ball: 2004 Preview of Socially Responsible Investing Performance
    by William Baue

An overview of the trends that may affect SRI performance in the year ahead, among other issues to mull over when considering socially responsible investment.

How will socially responsible investments (SRI) perform in 2004?

"Unless you're Pat Robertson and have gotten the Word, you can only look back on the past three years and say, 'Your Ouija board's as good as mine,'" says Peter Kinder, president of KLD Research & Analytics, which manages the Domini Social Index (DSI).

With this caveat, embarks upon the inexact science of crystal ball gazing.

"We believe health care and biotechnology funds are behind the market and we think a good case can be made for them shining in 2004," said Don Cassidy, senior research analyst at Lipper, a Reuters-owned firm that tracks 80,000 mutual funds worldwide. "To the extent some SRI funds are comfortable with such stocks, they could be helped or hurt accordingly."

Some of the top performing SRI funds of 2003 benefited from overweighting in health technology, which performed well, while limiting their exposure to big pharmaceutical companies, whose gains were sub-average last year, according to Mr. Cassidy.

"We do suspect that emerging markets will continue to do better than matured economies, so that could make the average SRI world-equity fund suffer the same disadvantage as in 2003," added Mr. Cassidy (see yesterday's article for more details). "Finally, we believe that sometime in 2004 large-cap stocks will assume leadership from small-caps."

An inclination toward small-caps benefited some socially responsible investments in 2003. Most visibly, the Calvert Social Index (ticker: CALVIN) generated a total return (dividends reinvested) of 30.85 percent while the S&P 500 generated a total return (dividends reinvested) of 28.66 percent last year. Whether a small-cap bias rewards or punishes performance this year remains to be seen, as does the effect of stock quality.

"Low quality stocks led performance in 2003 and this is not sustainable, therefore, high quality companies with strong fundamentals that are currently undervalued are poised to lead the way in 2004," said Elizabeth Laurienzo, director of corporate communications at the Calvert Group. "This is good news for social investors because we think there is a correlation between high quality companies and socially responsible companies."

Whether crystal ball gazing such as this attracts assets into SRI would be hard to ascertain, though it is clear that a significant amount of money continues to flow into SRI. Heading into 2004, SRI inflows increased significantly, almost doubling from about $280 million in November 2003 to $510 million in December 2003, according to Lipper.

"No doubt the mutual funds scandal is pushing some new people to invest 'cleaner,'" said Mr. Cassidy, referring to the recent mutual fund company scandals such as Putnam Investment's late-trading shenanigans.

Putnam experienced outflows of $13 billion in November 2003 alone, according to Financial Research Corporation (FRC), a Boston-based mutual fund tracking firm.

Since it is individuals that commit unethical practices such as late trading, SRI firms are not necessarily immune from this scandal.

"Unless you believe that socially responsible funds are run by people who are generally more moral than other businesspeople, there's no reason to think that these abuses have not happened at socially responsible funds, and people should keep an eye out for that," said Mercer Bullard, president and founder of Fund Democracy, a mutual fund shareowner advocacy organization.


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