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September 03, 2002
Institutional Investors Are Slow to Apply SRI to Fixed Income
    by William Baue

While many institutional investors apply SRI strategies to the equity portion of their portfolios, they are leaving their income investments relatively untouched.

Pension fund managers and other institutional investors are increasingly using socially responsible investment (SRI) strategies such as shareowner action and screening. Like most investors, their portfolios include both equity, such as stocks, and income, such as bonds. However, institutional investors that apply SRI strategies to their equity holdings do not always apply those strategies to the fixed income portion of their holdings.

"In my opinion, there is not adequate attention paid to the social and environmental evaluation of fixed income investments by institutions that engage in SRI strategies," said a director of socially responsible investing at a large pension fund who wished to remain anonymous.

A number of pension fund participants and SRI investors could be unpleasantly surprised if they checked the consistency with which portfolio managers apply SRI strategies to equity holdings and income holdings.

"Institutional investors have been very slow in utilizing fixed income as an SRI vehicle. We are somewhat mystified as to why," said Alan Segars, managing director at Furman Selz, which manages the ING Socially Responsible Fixed Income Fund. "We can only speculate that it relates to lack of product availability by investment firms and lack of awareness by investors."

It does not appear to be caused by the poor performance of screened income portfolios.

"We found that an SRI portfolio of screened corporates outperformed the Lehman Corporate Bond Index by two percent annually between 1994 and 1998," Mr. Segars told The ING Socially Responsible Fixed Income Fund's performance supports these findings. "Since inception, the composite has outperformed the Lehman Corporate Bond Index by 30 basis points annually. It outperformed [the index] by 360 basis points for the year ended June 2002. So far in the third quarter, the composite is ahead of the index by 200 basis points."

Mark Haney of the Evangelical Lutheran Church in America (ELCA) Board of Pensions concurred that institutional investors can achieve solid returns with their fixed income portfolio. He commented that fixed income investments that do not meet social screens can be more easily replaced than equity investments.

Mr. Haney said, "On the positive social investment side, we have found more fixed income than equity opportunities that meet our criteria for risk adjusted market rates of return. These include certain mortgage-backed securities, taxable municipals, and private placements, and could include sovereign and government sponsored debt not available on the equity side."

From a social investor's perspective, screening fixed income investments could be considered more important than screening equities since shareowner action is not possible with bond ownership.

The ING Socially Responsible Fixed Income Fund employs a two-step screening process. First, it applies an avoidance screen, weeding out companies involved in alcohol, tobacco, and weapons sales; gambling; nuclear power generation; environmental problems; labor issues; and animal cruelty. Second, it applies affirmative screens to identify companies with superior environmental and social performance. Examples include companies whose products promote alternative energy or whose policies support domestic partner benefits for gay and lesbian employees.

The fund's top three holdings include Fannie Mae (ticker: FNM), Kroger (KR), and Lowe's Companies (LOW).

Given the current economic situation, institutional investors may find the time ripe to begin applying SRI strategies to the income portion of their portfolios.


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