May 05, 2005
Long-term Performance of 15 Year-Old Domini 400 Social Index Helps Validate SRI
by William Baue
Since its 1990 inception, the DSI has outperformed the S&P 500, helping quash the widespread
perception that socially responsible investing automatically underperforms.
A decade and a half ago, conventional wisdom held that engaging in socially responsible investing
(SRI) required sacrificing financial returns, a belief based not on data so much as on
predilection. Seeking to generate hard data on SRI performance, Peter Kinder, Steve Lydenberg, and
Amy Domini created the Domini 400 Social Index (DSI), which celebrates its 15th birthday this
month. To form the index, KLD Research &
Analytics (named after the last names of its founders) applies exclusionary social screens to
the S&P 500 then adds stocks that pass positive screens to reach the goal of 400 constituents.
The 15-year track record of the index demonstrates that SRI does not necessarily
sacrifice returns but rather that it performs competitively, and indeed sometimes outperforms, the
"The Domini index has helped validate socially responsible investing
through its long-term record, which is very similar to that of the S&P 500," said David Kathman, an analyst with mutual fund
rating agency Morningstar who covers SRI.
Since its May 1, 1990 inception through April 30, 2005, the DSI has generated 438.79
percent total returns, almost 60 percentage points more than the S&P 500's returns of 381.89
"I think that's enough of a counter to people who think that SRI investing will
automatically underperform," Mr. Kathman told SocialFunds.com.
"But like any portfolio,
[the DSI] has been up and down when compared with unscreened benchmarks," said Tom Kuh, managing
director of KLD's indexes.
For example, the DSI generated annualized returns of negative
4.08 percent over the past five years, underperforming the S&P 500's annualized returns of negative
2.95 percent. Over the past ten years, however, the DSI's annualized returns were 10.83 percent,
outperforming the S&P 500's 10.28 percent annualized returns.
"The Domini index is a bit
growthier than the S&P 500 and has a significantly bigger tech weighting, because tech companies
are more likely to pass its screens than things like industrials and utilities, which often have
issues with pollution or defense contracting," said Mr. Kathman, explaining the divergence between
the DSI and the S&P 500. "So the Domini index will tend to do better than the S&P 500 in growthy
markets like 1998 and 1999 (when it beat the S&P) and worse in bear markets, especially bear
markets for tech like 2000-2001, when it trailed the S&P."
"This is a general tendency,
and can break down when other factors come into play--for example, the index and the fund did
better than the S&P in the 2002 bear market, when Domini's focus on shareholder friendliness helped
it avoid most of the stocks that got caught up in scandals that year, such as Enron, Worldcom, and
Tyco," he added.
Establishing quantitative evidence of SRI's competitive performance has
proven key not only for encouraging individual confidence in SRI, but more importantly, it has
allowed institutional investors to employ SRI without fear of breaching their fiduciary duty.
The reach of the DSI is broad. It serves as the basis for the Domini Social Equity Fund
(ticker: DSEFX) from Domini Social Investments. It also serves as a benchmark for
other SRI funds and investments. And it is routinely used by researchers and academics performing
quantitative research on SRI performance.
The DSI also served as the launching pad for
several other socially screened indexes, including the KLD Large Cap Social Index (LCSI), the KLD Broad Market
Social Index (BMSI), the KLD
NASDAQ Social Index (NSI), and
the KLD Catholic Values 400 Index (CVI). In all, more than $8 billion is invested
in funds based on KLD indexes.
Most recently launched is the KLD Select Social Index (SSI), which answers institutional
investors' call for broad diversification and risk control with a sophisticated strategy. Instead
of screening, the index underweights companies with poor social and environmental ratings and
overweights companies with strong ratings.
"The financial services industry has become
much more sophisticated in its analysis of risk and return than it was in the late 1980s," said Mr.
Kuh. "Our team is committed to ensuring the Domini 400 will contribute as much in the coming 15
years as it has in the past 15."