Social responsibility is in the eye of the beholder. Consider Vanguard Group's new "socially responsible" mutual fund, the latest way for fund buyers to avoid investing in companies that make alcoholic beverages, tobacco, weapon systems and the like. While Vanguard's low cost structure sets the fund apart from two other index funds already available on this investing front, there are other key differences among the three funds: some of the stocks they hold.
In comparing the new Vanguard Calvert Social Index Fund and a pair of longer-standing socially screened index funds from other firms, the variations in stocks passing muster highlight the tricky task of deciding which stocks are indeed socially correct. Among the 50 largest U.S. stocks (ranked recently by the total value of their shares outstanding), 20 stocks, or 40%, trigger a split decision among the Vanguard Calvert fund, Domini Social Equity Fund and Citizens Index Fund. While the three funds evaluate stocks using several of the same criteria, the application of those screens "gets down to judgment calls," says John Shields, president of Citizens Funds in Portsmouth, N.H.
Consider, for instance, Wal-Mart Stores, one of the largest stocks on which the three funds disagree. "We have a practice of excluding retailers who sell firearms," as Wal-Mart does, says John Blanchard Jr., senior vice president of social products and policy for Calvert Group Ltd., a unit of insurer Ameritas Acacia Mutual Holding Co., Lincoln, Neb. Hence, Wal-Mart's absence from the new Calvert Social Index whose component stocks the Vanguard fund will buy. (Calvert is also planning its own fund linked to the index.) Citizens Funds has different gripes keeping Wal-Mart off its proprietary Citizens Index and out of the Citizens Index Fund, which has $842 million in assets. Wal-Mart doesn't demonstrate the best treatment of employees, says Mr. Shields, and its arrival in a rural community can be a nightmare for small local stores. But Wal-Mart makes the grade at Kinder, Lydenberg, Domini & Co., which assembles the Domini 400 Social Index mirrored by Domini Social Equity, with $1.7 billion in assets. While the Boston firm has some reservations about Wal-Mart's activities, it has chosen to address them by engaging Wal-Mart management in discussions and by submitting proxy resolutions, says research director Steven D. Lydenberg. This year, for instance, the firm's fund-management affiliate is cosponsoring a resolution urging Wal-Mart to use independent monitors overseas to ensure that the goods it sells aren't manufactured under sweatshop conditions. At Wal-Mart, company spokesman Jay Allen says the retailer isn't perfect but is a good corporate citizen. "We do a lot of things right in communities," he says, "and our customers tell us that all the time."
The social-investing fund firms aren't always forthcoming about why companies don't make their lists and their funds. Citizens officials sometimes will answer questions about why a stock is excluded, Mr. Shields says, but "I try to showcase the companies that are passing the screens as opposed to dwelling on those that don't." At Calvert, in Bethesda, Md., "we have a policy that we don't speak about companies that fail on a social screen," spokeswoman Elizabeth Laurienzo says. While Calvert officials agreed to discuss WalMart and a few other stocks, they wouldn't explain, for instance, why the Calvert index excludes Coca-Cola and Texas Instruments -- two stocks that pass muster with both Citizens and Kinder Lydenberg. Some social-investing firms might reject Coca-Cola because of recent minorityemployment controversies, Mr. Shields of Citizens says, although his firm is satisfied with the strong antidiscrimination stance of Coca-Cola's top management. "We like them a lot as a socially responsible company," the Citizens official says. Just this week, Coca-Cola said it is committing $1 billion over five years to increase its dealings with minority businesses and make itself more visible in ethnic communities. Meanwhile, some Texas Instruments components are used in military gear, but that isn't enough to drop the company from the Citizens and Kinder Lydenberg lists.
While the social-investing outfits often disagree about particular stocks, Messrs. Shields and Lydenberg say the introduction of the Vanguard Calvert fund is a significant advance for the social-investing field. Vanguard's arrival "obviously increases the competition significantly for us," Citizens' Mr. Shields says, but it also "adds a credibility and a legitimacy to the asset class that will help us." Vanguard, of Malvern, Pa., is the nation's second-largest fund company, with nearly $500 billion in stock- and bond-fund assets, according to Financial Research Corp. of Boston. "We've had lots of requests from clients over the years for a portfolio that screens out certain kinds of companies," says Jeff Molitor, a Vanguard principal and director of portfolio review. For socially conscious investors, a key advantage of the Vanguard Calvert fund is the low cost structure. Vanguard expects annual operating expenses paid by investors to be only 0.25% of assets. By contrast, expenses run an average 1.53% at the 68 U.S.-stock funds that Morningstar Inc., Chicago, identifies as "socially conscious," the overwhelming majority of which are so-called actively managed funds, which means they use stock pickers, not indexes, to determine their holdings. And while benchmark-tracking index funds are typically much less expensive than actively managed funds, Citizens Index Fund has a relatively steep 1.49% expense ratio. The expense ratio of the Domini Social Equity portfolio is 0.95%, meanwhile. (There are lower-fee versions of the Vanguard, Citizens and Domini funds for institutional investors.) Teachers Insurance & Annuity Association-College Retirement Equities Fund, or TIAA-CREF, also recently introduced a low-cost social-investing fund. While it isn't an index fund, TIAA-CREF Social Choice Equity Mutual Fund has an annual expense ratio of just 0.27%, the New York company says.
--- GOING GLOBAL: Kinetics Asset Management Inc., home of the Internet Fund, is expected to announce today that it has hired Chase H&Q, a division of Chase Securities Inc., to advise it on acquisitions and new distribution opportunities around the world. The agreement could involve niche acquisitions of other fund companies as well as joint-venture opportunities to distribute the Internet Fund abroad, says Richard Klein, managing director at Chase Securities. The one thing the agreement won't involve is the sale of Kinetics, a small New York-based fund company. "Certainly we are not looking to be acquired," says Steven R. Samson, president and chief executive officer of Kinetics Asset Management. "We anticipate becoming a global organization [with] our products and services available around the world." The $1.5 billion-in-assets Internet Fund fueled Kinetics Asset Management's exponential growth over the past three-and-ahalf years, but after posting a blistering 216.44% return in 1999 when the average technology fund rose 137%, it's off 28% through Tuesday. The Lipper Science & Technology category was off 2.3% through Tuesday. Still, the Internet Fund boasts a three-year annualized return of 143.88%, compared with 61% for its peers. "They have an asset that is unparalleled in the industry -- which is that track record," says Mr. Klein. "You can leverage that." In recent months, Kinetics has introduced several new Internet subsector funds, along with a Middle East Growth Fund and Small Cap Opportunities Fund. -- Laura Saunders Egodigwe
--- Split Decisions Three socially-screened index funds come to different decisions on some large stocks Citizens Domini Vanguard Calvert Stock Index Social Equity Social Index* Coca-Cola Yes Yes No WorldCom Yes No No Oracle No No Yes Pfizer No No Yes Texas Instruments Yes Yes No Wal-Mart Stores No Yes No *New fund; stock-selection information is based on Calvert Social Index benchmark
Posted by permission of the Wall Street Journal, October 22, 2001. Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.