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August 21, 2009

Many SRI Funds Are Outperforming Benchmarks in 2009
    by Robert Kropp

The Appleseed Fund continues its strong performance among domestic equity funds, while Pax World posts highest return on investment among fixed-income products. -- According to its most recent report on socially responsible investing (SRI) trends in the US, the Social Investment Forum (SIF) found that by the end of 2007, SRI assets had grown to $2.71 trillion. Eleven percent of the $25.1 trillion in total assets under management in the US was involved in SRI by that time, and the number of socially and environmentally screened funds had increased to 260.

Of course, the data included in the SIF report on SRI was compiled before the economic meltdown of 2008. Now, as 2009 has passed its halfway point, how are SRI funds performing when measured against their benchmarks? Has increased attention to environmental, social, and governance (ESG) led to outperformance by SRI funds in 2009?

Adam Strauss, Portfolio Manager for the Appleseed Fund, shied away from general pronouncements about the impact of the economic crisis on the performance of the fund he manages.

"We outperformed in the first quarter by steering clear of a lot of the large-cap banks that lost a lot," Strauss told "We found incredible values in some small-cap stocks, which as the market has appreciated have appreciated even more."

Through July 31, the Appleseed Fund had a return on investment of 35.21%, second among domestic equity funds to the Parnassus Workplace Fund, which posted a return on investment of 39.61% for the same period. However, the return on investment over a one-year period by the Appleseed Fund, which was launched in December, 2006, was 12.42%.

"Over the last year we've outperformed all mid-cap domestic equity funds," Strauss said.

Strauss described the investment strategy that Appleseed uses in picking stocks.

"We have negative screens and positive screens," he said. "We screen out tobacco, alcohol, weapons, and gambling. On the positive side we look for strong environmental performance, and companies that have a strong human rights record. We also invest in community development."

"We don't try to forecast where the market is going," Strauss continued. 'We look at individual companies that are well-managed with good balance sheets and have stocks that we think are significantly discounted. When we find good SRI companies that are priced like that, then we buy."

"What makes us different from some other SRI funds is that our fund is managed from a value perspective. We spend a lot of time analyzing downside risk."

Among fixed-income funds, the Pax World High Yield Bond Fund posted a remarkable return of investment of 27.42% through July 31. Its return on investment over a one-year period was a more modest 0.29%.

Other strong performers among fixed-income funds were the PIMCO Total Return Fund, with a year-to-date return on investment of 8.42% and a one-year return of 11.41%, and the MMA Praxis Intermediate Income Fund, with a year-to-date return of 7.47% and a one-year return of 10.18%. spoke with Chris Brown, the Chief Investment Officer for Pax World, about the strong year-to-date performance of the High Yield Bond Fund.

"Our high-yield fund has experienced strong inflows this year," Brown said. "It has a five-star rating for three and five years, because of the fund manager's bias toward stocks in companies with high credit ratings."

Of the Pax World fund family in general, Brown said, "We're having a really good year. Our Pax World Small-Cap Fund and the Pax World International Fund are both in the top quintiles of their categories."

Asked about specific investment strategies that helped account for the strong relative performances of Pax World funds, Brown said, "Our ESG overlay is helping us, by helping us find investment themes that will outperform the overall market."

Another fund family that has performed relatively well in 2009 is that of Domini Social Investments, whose Social Bond Fund returned 4.46% year-to-date and 9.15% for one year. While it slightly underperformed its benchmark in the second quarter of 2009, over the year-to-date and one year it outperformed.

Steve Lydenberg, Chief Investment Officer of Domini, said, "High-quality fixed-income funds have done well in the last six months." About Domini's fixed-income investment strategy, Lydenberg said, "We provide our money management firm with guidelines relating to social impact. For instance, we don't invest in US Treasuries, because of the US involvement in nuclear weapons. And we allocate up to 10% to community investing."

Domini has four Social Equity Funds, which have also performed well. Year-to-date returns of the four funds range from 17.69% to 24.68%. All four equity funds outperformed their benchmarks in the second quarter of 2009. While the funds posted losses for one year, their performance in that regard was far from uncommon, given the meltdown of stock markets in 2008.

Lydenberg described Domini's strategy for equity investments.

"Our equity investment strategy includes a combination of negative screens and key performance indicators. We look at stakeholder relations, and evaluate a company's business model," he said.

"One example of our use of key performance indicators can be found in the pharmaceutical industry," Lydenberg continued. "Companies with products that are patent-protected do not meet our criteria to the degree that those that market generic drugs and vaccines do, and would have to perform better in terms of stakeholder relations for us to invest in them."

So the question remains to be answered: with increased attention to issues of corporate governance in the wake of the crisis (as evidenced by shareowner activism relating to executive compensation), evolving regulatory attention to climate change, and stimulus spending on infrastructure, will the growth of SRI funds be propelled into mainstream investing, as a recent report from Robeco Investment Management asserts? While the experts interviewed by expressed a reluctance to generalize in such terms, the performance of SRI funds in the remaining quarters of 2009 should begin to provide some answers.

© SRI World Group, Inc. All Rights Reserved.

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