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September 22, 2005
Domini Goes Abroad with New European Fund
    by William Baue

The fund allows US social investors to diversify their portfolios into a region with attractive investment opportunities and corporations with strong sustainability commitments.


One limiting factor of socially responsible investing (SRI) in the US has been a relative dearth of mutual funds in certain asset classes, styles, and regions, making it challenging to diversify portfolios broadly. For example, of the 45 broadly screened SRI equity and balanced funds tracked in the SocialFunds.com Mutual Funds Center, only five are international.

Domini Social Investments seeks to redress this limitation by launching on October 3 the Domini European Social Equity Fund (ticker: DEUFX). The fund will focus on mid- and large-capitalization companies with strong corporate social responsibility (CSR) records in that region. It is the first US SRI fund to focus on a specific international region.

"From an investment perspective, Europe is the largest stock market region outside of the US, offering opportunities for portfolio diversification," said Jeff MacDonagh, Domini's SRI portfolio manager who is taking the reins on this fund. "European integration is driving productivity and profit growth, and the region enjoys a trade surplus as well as relatively high rates of household income and savings."

Domini's no-load fund will have a 1.6 percent expense ratio, putting it on the lower side compared to other SRI international and global funds. Portfolio 21 (PORTX) has a lower expense ratio (1.5), while the MMA Praxis International Fund (MPIAX--1.63), Enterprise Global Socially Responsive (EGSAX--1.75), the Calvert World Values International Fund (CWVGX--1.97)and Citizens Global Equity Fund (WAGEX--2.05) all have higher expense ratios.

"From a social investment perspective, European companies are leading the pack on CSR issues," Mr. MacDonagh told SocialFunds.com. "For example, over 80 percent of vaccines are made in Europe and 70 percent of new residential developments in the UK are on redeveloped land."

"Europe is committed to the Kyoto Protocol on global warming, so we're seeing significant growth in alternative energy," added Steve Lydenberg, Domini's Chief Investment Officer. "Almost three-quarters of new windpower capacity installed in the world last year was in Europe."

Lack of SRI research covering global markets has hampered the development of US-based international social investing, according to Mr. MacDonagh, who in the past worked for Boston-based SRI research provider KLD Research & Analytics.

"Five years ago, when I was researching nukes for KLD, I had a lot of trouble finding information in English, whereas now, I'd say about 95 to 99 percent of reports coming out of Europe are in English," he said. "This was another part of the reason why we decided to enter the European region."

Domini is using a combination of external and internal SRI research.

"We're sourcing our research from the SiRi Company, a global consortium of SRI research providers, for the initial-level coverage of major-name companies," explained Mr. MacDonagh. "SiRi's Harmonized Profile, which collates information from multiple SRI research sources, is similar in form to KLD's research but focuses more on management and corporate governance, reflecting the fact that Europeans take a more structural approach to assessing companies."

"Our in-house research comprises press searches over Nexis using an algorithm to identify items on corporate social and environmental issues," he continued. "We also use Bloomberg to examine ownership information, as well as reading companies' annual reports and CSR reports."

Domini will apply its standard social and environmental screens to the fund, including exclusionary screens on tobacco, alcohol, gambling, nuclear power, firearms and nuclear contractors. Screening will also take into consideration performance on corporate governance, community and corporate citizenship, employee relations and diversity, environment and sustainability, labor and human rights, and product and consumer issues. Domini will also engage in shareholder advocacy with fund holdings.

While the launch is not until early next month, Domini has already announced a subscription period for investors to pre-purchase shares at $10.

"We're offering the advance subscription process to seed the fund with a sizable amount of assets for its launch," said Mr. MacDonagh. "We're very pleased with the positive response we've gotten so far, with a large number of subscriptions already drawn predominantly from our core base of shareholders, though of course the fund is also open to the public."

The fund, which will be submanaged by Sylvia Han of Wellington Management Company, will hold between 65 and 70 stocks, and will benchmark financial performance against the MSCI Europe Index.

 

 
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