Whether the screens seem fair, the returns of social funds appear solid. Investors can support their favorite causes without necessarily sacrificing their wallets.
Portfolio manager Nick Kaiser accomplished that feat by avoiding financial stocks, which have been among the biggest losers this year. Does Kaiser deserve praise for brilliant foresight? Not necessarily. Designed to serve Muslims, Amana never buys financial stocks because Islamic law forbids the lending of money bearing interest.
Amana's showing underlines the success of socially responsible funds, which invest according to a variety of ethical guidelines. Some social portfolios steer clear of gambling stocks, others invest only in so-called green companies. During the past decade, domestic equity funds that invest according to social criteria have returned 4.7% annually, more than a percentage point better than the S&P 500. In the downturn of the past year, social funds lost 2 percentage points less than the benchmark.
The success of the funds should come as a surprise to academics who have long sneered at social funds, claiming the do-gooders are bound to underperform. They argue that social funds violate a cardinal rule of investing: It pays to diversify. Portfolios with broad diversification tend to outdo narrow collections of stocks. By this thinking, social funds should suffer from a handicap because they screen out some stocks.