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
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.