August 22, 2002
SRI Income Funds Yield Competitive Dividends
by William Baue
Often overlooked, SRI income funds allow social investors to diversify their portfolios.
Mutual funds offer a variety of investment strategies. Most people equate mutual funds with equity
(stock) funds, which often prioritize growth. Less well known are income funds, which aim to
provide current income, as the name suggests. Income is paid in dividends or coupon payments from
bonds or preferred stocks (preferred stocks take precedence over common stocks in paying dividends
to owners). What characteristics should one look for in a good income fund?
answer to this is the same as what matters in choosing the right equity fund: the fund's
performance over various time periods, the individual investor's risk tolerance, manager tenure,
the fund's expense level, the load, and tax efficiency," said Lipper Senior Research Analyst Andrew
According to data provided by Lipper, a Reuters-owned firm that tracks 80,000
mutual funds worldwide, socially responsible investment (SRI) income fund performance compares
favorably with the performance of income funds that do not apply SRI strategies. The cumulative
total return of SRI income funds year-to-date (as of July 31) was 3.46 percent, compared to non-SRI
income funds' cumulative return of 3.34 percent. SRI income funds' cumulative total returns were
22.79 percent over three years, 33.38 percent over five years, and 90.93 percent over ten years.
Non-SRI income funds' cumulative total returns were 22.44 percent, 31.85 percent, and 88.45 percent
over three, five and ten years, respectively.
Mr. Clark advises investors to evaluate
their own risk tolerance first and foremost.
"If they are fairly risk averse, then
investment in treasury or government funds is probably best," Mr. Clark told SocialFunds.com. "If
their risk tolerance is moderate, then they can start to include mortgage and investment grade
corporate bond funds. If their risk tolerance is on the high side, then I would include all of the
above as well as emerging market and high yield funds."
However, social investors with low
risk tolerance may want to avoid income funds invested in treasury bonds.
"We have a
zero-percent tolerance for war-related activity; therefore, none of our funds invest in direct
obligations of the U.S. Treasury Department since these issues (bonds) are partially used to fund
the Department of Defense," said Pax World High Yield Fund
(ticker: PAXHX) Portfolio Manager Diane Keefe.
Instead, SRI income funds tend to invest
in government sponsored enterprises (GSEs) that have a positive social impact.
example, we invest in Freddie Mac
(FRE) and Fannie Mae (FNM) debt
issues because they finance low and moderate income housing," said Parnassus Investments President
Jerome Dodson. Parnassus offers a Fixed Income Fund (PRFIX) and
an Equity Income Fund
(PRBLX). The Equity Income Fund blends income with capital growth.
To investors with a
higher risk tolerance, high yield income funds offer certain benefits over equity funds. Those
benefits include a higher risk/reward ratio.
"Also, as the majority of the investment
return in high yield comes in the form of interest payments, high yield funds would be ideally
suited for investors with low tax rates or those in preferred accounts such as IRAs," Ms. Keefe
told SocialFunds.com. "Institutions generally have between two and seven percent of their
portfolio in high yield, and foundations find high yield an attractive investment because they can
spend the interest income on their programs."
Ms. Keefe explained that Pax World has
generally had little problem identifying companies that pass its SRI screens.
that has been somewhat challenging is finding environmentally strong performances in cyclical
companies, but we believe that we have done a pretty good job," said Ms. Keefe. "We purchased
Standard Pacific (SPF), a homebuilder that uses solar heating, and we unearthed Millennium (MCH), a
chemical company that uses best practices. We also own Messer Grieshiem, an industrial gas
products company that passed our environmental screens."
Employing other SRI strategies,
such as shareowner action, can be equally challenging.
"In a bond fund, it is important to
remember that you are holding nonvoting securities, which changes the nuances of advocacy," said
Anita Green, director of Social Research and Corporate Activity for Pax World. "Since we do not
have the option of initiating a shareholder resolution, we have to rely heavily on dialogue with
management prior to investment. This means the initial screening is even more stringent
In addition to screening and shareowner action, SRI income funds practice
community investing. For example, the Domini Social Bond Fund
(DSBFX) holds more than two million dollars in certificates of deposit (CDs) with 19 community
development banks and credit unions, such as the Vermont Community Development Credit Union and
"As one example of the institutions the fund invests in, Wainwright
Bank's progressive agenda includes a commitment to affordable housing, community development,
women's rights and the gay and lesbian community," said Adam Kanzer, director of shareholder
activism at Domini.
For social investors seeking to diversify their portfolio with
long-term income fund holdings, the fluctuation of interest rates "is of no concern," according to
Mr. Clark. Now is as good a time as any to buy SRI income funds.
Order a free fund
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