March 11, 2004
Socially Responsible Index Funds: Passive Management Means Less Expense
by William Baue
SRI index funds offer competitive performance with lower expense compared to actively managed SRI
Many investment advisers recommend investing in passively managed mutual funds such as index funds
to avoid the expenses of actively managed funds, which can cut into returns. This applies to
socially responsible investment (SRI) mutual funds and non-SRI funds alike. Social investors
seeking to minimize expenses have several options in SRI index funds.
people turn to index funds, whether social or traditional investors, is because over the long term
it has proven to be very difficult for active managers to outperform an efficient market,
particularly given the higher expense ratios of many actively managed funds," said Kyle Johnson,
director of institutional client relationships at Domini Social Investments.
Domini offers the oldest SRI
index fund, the Domini Social Equity Fund (DSEFX). The fund tracks the
Domini 400 Social Index (DSI),
which was created in 1990. The DSI 400 is constituted of about half of the S&P 500 companies that
passes its social and environmental screens, then another 150 companies with strong social and
environmental performance are added.
Over the past decade (as of the end of February), the
Domini Social Equity Fund has generated annualized returns of 10.78 percent, while the DSI's
annualized returns are 12.12 percent and the S&P 500's are 11.36 percent. The fund's one-year
returns are 36.92 percent, compared to 38.52 percent for the S&P 500.
The total annual
operating expenses are 1.26 percent, with management fees of 0.20 percent, distribution fees of
0.25 percent, and other expenses of 0.81 percent, though it maintains an expense cap of 0.95
percent through November 30, 2004.
The youngest SRI index fund, the Citizens 300 Fund
was launched just last year. It tracks the Citizens Index, which is
comprised of approximately 300 companies chosen for industry representation, financial soundness,
and corporate responsibility. Since its inception until the end of February, the fund has
generated returns of 12.01 percent.
The fund’s total annual operating expenses are
1.61 percent, with 0.20 percent for management fees, 0.25 percent for distribution fees, and 1.16
percent for other expenses.
"As with any newly established fund, the Citizens 300 Fund
must bear start-up costs, which tend to inflate a fund's total expense ratio during the first year
of operations," said Gary DeSimone, director of marketing communications for Citizens Funds.
Citizens has therefore voluntarily capped
expenses at 0.90 percent, though it may terminate this waiver at any point.
Citizens 300 Fund has the smallest list of constituents of SRI index funds, the Calvert Social
Index Fund (CSXAX), which was launched in
June 2000, has the largest. The fund is based on the Calvert Social Index (CSI), "one of the most broadly
constructed measurements of the performance of socially responsible companies," according to
Elizabeth Laurienzo, director of corporate communications for the Calvert Group.
"Calvert takes the 1,000 largest
companies in the US, applies its social criteria, and whatever is left is the CSI--there is
absolutely no active management component in the process," Ms. Laurienzo told SocialFunds.com.
Total annual operating expenses for the fund are 1.62 percent, with 0.45 percent for management
fees, 0.25 percent for distribution fees, and 0.92 percent for other expenses, though Calvert caps
expenses at 0.75 percent. For a lower-expense version of essentially the same fund, try the
Vanguard Calvert Social Index Fund (VCSIX), which was launched in
May of 2000. The fund maintains an expense ratio of 0.25 percent due to the huge Vanguard Group's economies of scale.
As of the end of February, the Vanguard Calvert fund’s one-year returns are 37.80
percent, while returns are 40.02 percent for the CSI and 40.39 percent for its benchmark, the
Domini’s Kyle Johnson offered a parting note of caution on comparing
the performance of these index funds because they may be categorized in different asset classes.
As an example, he said the Domini Social Equity Fund is a large cap blend while the Calvert Social
Index Fund is classified as a large cap growth offering.