A Fresh Look at Socially Responsible Mutual Funds

Do morality screens harm performance? When can a socially responsible fund outperform the market?

A dollar bill growing on a tree.

8 Great Socially Responsible Funds

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In some ways, this is just a question of semantics. A fund that looks exclusively for "positive" indicators like support for human rights, for instance, is unlikely to invest in a weapons company, even if the fund doesn't explicitly screen out firearms producers. 

Still, as SRI funds continue to feel pressure not only to avoid the bad but also to actively seek out the good, there is a chance that they will become increasingly concentrated in various sectors. This, in turn, will open them up to a host of sector dynamics that, for better or worse, are beyond their control. 

The long haul. Since socially responsible funds are a relatively new phenomenon, one of the biggest uncertainties is how they will fare over sustained periods. The question then becomes: What types of SRI funds stand the best chance of delivering solid long-term results? 

The most tempting answer is that the most flexible funds will hold up the best. All SRI funds have some restrictions, but some obviously have their hands tied much more than others. As such, it seems reasonable to conclude that the funds that are most able to move in and out of sectors as the market demands are the ones that will get the best results. 

But of course, there are also far more mundane factors at play. In fact, sometimes the biggest edge one fund can have over the other is its price tag. That's particularly true with SRI funds, which tend to be some of the more costly investments on the market. 

"A lot of these funds tend to be . . . expensive," says Kathman. "And that has more of an effect on returns than any SRI screens [have]."