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March 15, 2002
Social Index Funds Mirror Their Benchmarks
    by William Baue

Social index funds had a difficult year as benchmarks fell.


Almost a dozen years ago, KLD Research & Analytics, Inc. (KLD) launched the Domini 400 Social Index (DSI) to demonstrate how the application of socially responsible investment (SRI) criteria affects investment performance. The DSI is based on the S&P 500, the standard index of large capitalization companies. About half the companies on the S&P 500 failed to meet KLD's basic SRI criteria. To make up the difference, KLD added about 100 other large-cap companies that did meet SRI criteria and 50 firms with exceptional social characteristics. Since its inception, the DSI has outperformed the S&P 500 on a total return basis and on a risk-adjusted basis.

Index funds seek to replicate the performance of their benchmark. The Domini Social Equity Fund (ticker: DSEFX) appeared in June 1991, about a year after the advent of the DSI, which the fund tracks. In the past several years, the Calvert Group, the Vanguard Group, Walden Asset Management, and MMA Praxis have all introduced social index funds. The recent performance of all these index funds have lived up to their names, closely reflecting the performance of their benchmarks. All figures quoted in this article are current as of February 28, 2002, and have been provided by Weisenberger, except as noted.

The Domini Social Equity Fund employs a "full replication strategy" to duplicate as closely as possible the composition, proportion, and performance of the DSI. So far this year, the DSI is down 3.69 percent, while the S&P 500 has declined 3.36 percent. The Domini Social Equity Fund decreased 3.84 percent. Over the past year, the DSI fell 9.91 percent, the S&P 500 decreased 9.51 percent, and the Domini Social Equity Fund declined by 10.63 percent. The fund's fees, which support administrative costs such as shareowner action, figure into performance statistics.

Over the longer term, the DSI has performed more favorably in comparison to the S&P 500. Over the five-year period (on an annualized basis), the DSI returned 9.20 percent, the fund 7.93 percent, and the S&P 500 split the difference, up 8.48 percent. Over the ten-year span (again on an annualized basis), the DSI increased 13.27 percent, the fund gained 11.91 percent, with the S&P 500 falling in between, up 12.63 percent.

In April 2000, the Calvert Group launched the Calvert Social Index (CALVIN). The composition of the Calvert Social Index differs significantly from the DSI.

"The Calvert Social Index is based on our identification and screening of the 1000 largest U.S. companies," said John Nichols, Calvert's Vice President of Equities. "We reconstitute the index from a fresh evaluation of the 1000 largest U.S. companies annually." As of September 21, 2001, the index contained 627 companies.

The Calvert Social Index Fund (CSXAX), launched two months after the advent of the Calvert Social Index, is managed on a full replication basis. This year to date, the Calvert Social Index is down 5.5 percent, while the Calvert Social Index Fund is down 5.57 percent. Over the past year, the index fell 12.11 percent, and the fund decreased 12.38 percent. As stated previously, the S&P 500 declined 3.36 percent this year to date, and decreased 9.51 percent over the past year. Mr. Nichols explained the reasons for the fund's performance.

"The bursting of the Internet bubble and the subsequent decline in capital expenditures for expanding network infrastructure has beaten up [technology, the fund's largest] sector over the past two years," said Mr. Nichols.

The Vanguard Calvert Social Index Fund (VCSIX) similarly tracks its namesake.

"[W]e differ from [Vanguard] by offering a broader choice of share classes, and Calvert engages in dialogue on social issues with many of the companies in the Index," said Mr. Nichols. The respective administrative fees reflect this difference.

In July 1999, Walden Asset Management introduced the Walden B&BT Domestic Social Index Fund (WDSIX), based on its own reconstitution of the S&P 500, replacing those companies that do not meet its SRI criteria with companies that do. This year to date, the fund declined 3.91 percent. Over the past year, the fund fell 9.75 percent.

The MMA Praxis Value Index Fund, which introduced in May 2001, seeks to parallel the performance of the S&P 500/BARRA Value Index while employing socially responsible investment criteria. The fund is down 4.66 percent this year to date, according to the fund's website.

 

 
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