Mark Brandon is the Managing Partner of First Sustainable (, a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Tuesday, February 14, 2006

Socially Responsible Indexes

Low-cost and diversification are the key to a successful portfolio these days. I've said many times in this space that active management is not worth the money you pay for it. Indexing is the way to go if you want to capture the most that the market has to offer. The most popular indexes, however, do not have a social component. The indexes mentioned below do.
  • Calvert Social Index (Symbol: CSXAX, CSXBX, CSXCX depending on which class you own). I appreciate all that Calvert has done for the social investing field. The Calvert Social Index is a worthwhile benchmark. The fund, however, is exceedingly expensive for an index fund. All the performance criteria are quoted before fees. They have three classes of funds, depending on from whom you buy the fund. If you buy from an adviser, there is a max up-front sales charge of 4.75 percent which is patently ridiculous for an index fund.
  • Citizens 300 Fund (Symbol: CFCDX). You can see which companies are in this portfolio by clicking here. The fund charges no load, but the expense ratio of .9 percent is still very rich for an index fund. Environmentalism and diversity are their social criteria.
  • KLD Select Social Index (Symbol: KLD). This is an exchange traded fund, based on the widely used KLD benchmark. See this post for pros and cons of ETF investing. The ETF is a product of Barclay's iShares, and carries an expense ratio of .50, which is still pretty rich for an ETF. Quoting from KLD's own description of how they determine index constituents:
    • "The scores are derived from the ratings awarded to a company in its social and environmental profile. To come up with a score, the concerns are subtracted from the strengths and are normalized to give each issue area the same weight. KLD rates companies in 7 issue areas: community, corporate governance, diversity, employee relations, environment, product, and human rights. Finally to determine the company's weight in the Index, KLD applies an optimization process using the company's score, market cap, and industry. The optimization process allows for the Index to approximate the same industry weights as the Russell 1000 (upon which it is based), while controlling risk."
  • Mennonite Mutual Aid (Symbol: MVIAX, MVIBX, depending on which class). A useful PDF describing this fund can be obtained by clicking here. MMA has the best-performing funds of the last couple of years. However, there are 2 glaring problems with this fund. First, the fund charges a maximum of 4% sales load. Loads are not appropriate in index investing. Second, the fund itself varies substantially from its benchmark index. It has had variance of 20 percent or more (both up and down) versus the S&P Barra Value benchmark.
  • CREF Social Index - A useful fund fact sheet can be obtained here. The fund has a reasonable expense ratio (.37%) and the fund can be purchased without a load. The index trails the S&P 500 by a small percentage.
  • WilderHill Clean Energy Index (Symbol: PBW) - This is also an ETF, not a mutual fund. Expenses are capped at .6%, which is on the upper end of acceptable for an ETF. The components can be obtained from the Amex web site.
I must say I am disappointed by the choices in the field. Charging a load for an index fund is absolutely inappropriate, but half of the choices do just that. Furthermore, since indexing is a low cost way to invest, their expense ratios should be lower.


Blogger Jason Eaton said...

Do you expect lower returns from these SRI indexes compared to non-sri indexes due to fees and expenses? How does one build a competative SRI portfolio if the products are not availble? I am fairly new to the business and am so far finding it challenging to build a properly diversified, passive index portfolio of SRI funds. I seem to only be able to get exposure to domestic large caps, UK large caps, and the energy sector. Do you build the other asset classes in non-sri or do you accept active management and the associated higher fees and expenses from the remained of the SRI field?

12:48 PM

Blogger Mark Brandon said...

Good question, Jason:

To answer your first question, no, I don't expect lower returns, nor do I expect higher returns. The returns relative to the market are a function of a few things, including your social criteria, risk tolerance, level of diversification, etc. Generally, I believe that returns are not something you can control (the vast majority of academic studies show this is the case for the whole of the investment management field). You can control costs. Therefore, passive, low cost, and diversified are the way to go.

You should check into FolioFN. They allow fractional purchases of shares so you can create a diversified basket for low cost.

1:34 PM

Blogger R Linder said...

Hi Mark,

I came across your blog when searching on SRI indexes. By chance I am also from Austin, so perhaps we should link up for a face-to-face discussion.

I've been doing SRI since the mid 80's and have become somewhat disenchanted with the field. I want to continue to invest my values and not just for returns, but the industry is making this difficult.

Like many (including you from what I can gather on your site), I've come to the conclusion that the best strategy is to abandon actively managed funds nearly entirely, due to high costs and the inability of nearly all funds to successfully pick stocks that outperform the market. The problem for SRI is that there are so few SRI indexes and those that do exist are not diversified enough to put together a solid portfolio, e.g., lack of a small cap SRI index fund. In addition, as you note, SRI indexed funds don't do a good job of minimizing costs. For these reasons, I've found myself in the undesirable position of having to invest in some funds that are not SRI. How can I minimize this? Are the new European SRI indexes any help in this regard?

10:51 PM

Blogger Mark Brandon said...

R -

Please feel free to call me at 512-691-9577. Since you commented anonymously with no contact info, you need to call me.

To answer your question, the best SRI Index fund in the field is the Vanguard Calvert Index fund. It is low cost (25 basis points) and sufficiently diversified for most people. It is a large cap fund, though. Small cap SRI funds don't exist because the research to assure social conformity (not to mention financial prudence) is much more expensive due to the higher number of companies to follow.

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