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,
SocialFunds.com embarks upon the inexact science of crystal ball gazing.
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
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
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.
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.
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.