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October 29, 2002
SRI Index Fund Uses Overweighting and Underweighting to Fully Replicate S&P 500
    by William Baue

Instead of screening companies in or out of the Total Social Impact Fund, this enhanced index fund concentrates its holdings in positive social and environmental performers.

One of the defining features of socially responsible investment (SRI) mutual funds is screening. Negative screens, also known as exclusionary or avoidance screens, reject companies with poor environmental or social performance. Best-in-class and positive screens seek to identify better social and environmental performers. Using screens for index funds can be challenging because when the fund screens out poor social and environmental performers, it is unable to fully replicate the benchmark index. Cincinnati-based Summit Investment Partners has devised an index fund that addresses this issue; the fund achieves SRI objectives without altering the constitution of the benchmark.

“The Summit Total Social Impact Fund (ticker: SATSX) is an enhanced S&P 500 index fund that employs corporate responsibility ratings to enhance the underlying index,” Portfolio Manager Stephen Dillenburg told “It is the only SRI index fund that is a complete replication of the benchmark. It does not screen out companies . . . . Rather, it overweights and underweights companies based on their business practices toward stakeholders.”

The Total Social Impact (TSI) Fund employs TSI Ratings, which rate companies on their corporate responsibility in relation to eight stakeholder groups. These stakeholders include customers, employees, owners/investors, suppliers, competitors, the community, the environment, and society. Higher TSI Ratings prompt the fund to purchase more shares of these positive social and environmental performers. Conversely, lower TSI ratings cause the fund to minimize the holdings of these companies. The fund thus “rewards” positive performers by overweighting the investment and “punishes” poor performers by underweighting. TSI Ratings were devised by the Total Social Impact Foundation, a nonprofit organization founded by Summit Investment Partners to promote corporate responsibility globally. The Total Social Impact Fund is the first fund to use the TSI Ratings, which the Foundation makes available by license or subscription.

In addition to weighting companies differently depending on their social and environmental performance, Summit actively engages with companies as part of the TSI Rating process. The firm encourages companies to adopt progressive social and environmental practices and policies that are associated with higher TSI Rating scores.

Summit also actively votes proxies, most often in favor of shareowner resolutions that encourage companies to act more responsibly, according to Meg Collins of Summit’s Marketing Group. Summit intends to publish its proxy voting guidelines as well as its proxy voting record on the Web within the next six months. Summit does not file shareowner resolutions itself, according to Ms. Collins.

The TSI Fund tracks its benchmark, the S&P 500, very closely. As of September 30, 2002, the TSI Fund’s year-to-date returns were down 28.12 percent, while the S&P 500 returns were down 28.99 percent. The fund’s third quarter returns were down 17.09 percent, compared to the benchmark’s returns that had fallen 17.63 percent.

The performance from this time period shows that the Total Social Impact Fund earns returns competitive with its benchmark while simultaneously encouraging improved social and environmental performance from all of the constituent companies in the S&P 500.

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