Building A Low Cost Portfolio With Socially Responsible Funds
March 31, 2015

Building A Low Cost Portfolio With Socially Responsible Funds

Some of my friends don’t feel good about investing.  They want to make money. But they won’t support businesses that build missiles, hook kids on cigarettes or extract air polluting fossil fuels.  That rules out most actively managed funds and indexes. They don’t discriminate against specific types of companies.

Investors wanting to align their money with their ethics have two choices.  They could select their own individual stocks.  Or they could buy funds called Socially Responsible Investments, also known as SRIs.

Most SRI funds don't invest in industries that manufacture tobacco, alcoholic beverages, weapons or nuclear power. But SRI investors face a few challenges.  For starters, they may not find a fund that perfectly aligns with their personal beliefs.  But social responsibility means different things to different people. Dr.Charles H. Hennekens reported in American Journal of Medicine that obesity may soon overcome smoking as the leading cause of preventative death in the United States.  But SRI funds don’t usually screen against manufacturers of fast food, soft drink and processed foods.

So they have limitations.  And how they perform depends on who you ask. In 2005, researchers Rob Bauer, Kees Koedijk, Rogér Otten published International Evidence on Ethical Mutual Fund Performance and Investment Style in the Journal of Banking and Finance.  They found that U.S. Socially Responsible Investment funds underperformed conventionally managed funds from January 1990 to March 2001.

But a research paper by RBC Global Asset Management says otherwise.  The FTSE KLD 400 Index tracks the performance of socially responsible U.S. stocks.  From April 1990 to April 2012, it beat the S&P 500.

Building A Low Cost Portfolio With Socially Responsible Funds
Source:  RBC Global Asset Management

Morningstar’s David Kathman says the Parnassus Equity Income Fund (PRBLX) is the largest SRI fund in the United States. “It's one of six funds run by Parnassus Investments, which screens out companies involved with alcohol, tobacco, gambling, weapons, nuclear power, or having business dealings with Sudan.”

Management costs are a reasonable 0.87 percent per year.  And over the past ten years, it has beaten the market.  It averaged 10.44 percent per year, compared to a compounding annual return of 8.74 percent for the S&P 500.  Its 15 year track record is also impressive.  It averaged  a compounding annual return of 8.74 percent compared to 4.41 percent for the S&P 500.

But past results mean little.  Low fees are the best indicator of future success.  This should put socially conscious eyes on Vanguard’s FTSE Social Index (VFTSX). It charges a management fee of just 0.27 percent.  As Morningstar’s Russel Kinell says, “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.”

Building a diversified portfolio, however, also requires international exposure. But in the SRI department, pickings here are slimmer. What’s more, many are focussed on narrow sectors—so you may not get the diversification you’re looking for. 

Diversification means two things: investing in stocks of different countries and investing across different market sectors.  You need both.

Check out the PowerShares Global Clean Energy Portfolio ETF which invests in international companies focused on renewable sources of energy and technologies facilitating cleaner energy. Without broad diversification, returns look a lot like a rowboat in a hurricane. 

Powershares Global Clean Energy Portfolio Fund (PBD)

Building A Low Cost Portfolio With Socially Responsible Funds
Source:; YTD returns to February 28, 2015

The Pax World Balanced Fund’s diversification offers a more seaworthy ride.  It contains roughly 60 percent stocks and 40 percent bonds.  Nearly half if its exposure comes from outside the United States.  Management fees are 0.91 percent per year.

Pax World Balanced Fund (PAXWX) vs. PowerShares Clean Energy Portfolio (PBD)

Building A Low Cost Portfolio With Socially Responsible Funds
Source:; YTD returns to February 28, 2015

You can find a broad list of actively managed stock and bond SRIs at Some will meet your ethical standards.  Others won’t.  So read their prospectuses to see what’s right for you.  And always remember: diversify and keep investment costs as low as possible.

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.