Socially Responsible Funds Hang Tough

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Berkwits says he is pleasantly surprised that he has received very few panic-stricken calls from investors concerned about their funds' performance during the depths of the market downturn. "That tells us that, compared to a couple years ago, when we had a lot of outflows after a difficult quarter, this time we've had a real shift in our shareholder base to folks with a longer-term commitment to the green investment perspective we have," he says. That translates to hardly any redemptions, he adds.

At Boston-based Reynders, McVeigh Capital Management, $240 million in separately managed accounts had an aggregate return of just under 1% year-to-date as of May 7, compared with a 2.6% loss in the S&P 500 over the same period. Chat Reynders, a principal at the firm, attributes the performance to "very solid balance sheets and not a lot of leverage in the companies in our portfolios." For the year ended Mar. 31, the accounts that he and his partner, Patrick McVeigh, manage were up over 15%, vs. a decline of just over 5% in the overall market.

"Hot Space"

Considering that many SRI portfolios traditionally favor financial companies because they tend to fit socially responsible criteria, it's surprising that many SRI portfolios have outperformed other funds. Long before the market woke up to the dangers of the subprime wave, Reynders and McVeigh began to turn away from financials based on a broader understanding of what constitutes a sustainable business. For example, when Business Ethics magazine voted Fannie Mae (FNM) the most socially responsible company of the year in 2004, McVeigh sent a letter to the editor, attacking the government-sponsored enterprise for having turned itself into a large hedge fund by taking on an unwieldy amount of debt as it expanded into new markets. "Business Ethics said Fannie was in the business of building dreams. We said they're in the business of building nightmares by putting people in homes they can't afford," he says.

SRI managers said they don't think the market downturn has caused investors to waver in their commitment to socially responsible investing. Geeta Aiyer, a portfolio manager at Boston Common Asset Management, says a bigger test of SRI investors' commitment has been the past five years, during which the energy-extractive and defense industries have been among the strongest performing sectors. "For years we've been addressing the opportunity costs—what you give up by being a social investor," she says. "Now we see there's opportunity from being a social investor."

In fact, some SRI managers are seeing net inflows of cash into their funds since the year began. All eight of Pax World's sustainable investment funds are showing net inflows year-to-date, including five funds launched within the past nine months, says Joe Keefe, chief executive of the Portsmouth (N.H.)-based investment firm. "That surprises us because I've read that many fund companies are at net outflows because of the markets," he says. "It speaks to the fact that sustainable investing—green investing, call it what you want—is a very hot space right now."

The Many Draws of SRI Funds

The Pax World Balanced Fund (PAXWX) has attracted more than $42 million in cash so far this year. Over $9 million has flowed into Pax World's high-yield bond fund (PAXHX), while the recently acquired Women's Equity Fund (PXWEX) has grown by just over $5 million, says Keefe.

Heightened fears about the economy and corporate profits and valuations may even be helping to attract some investors to SRI funds. One of the draws is active ownership, where shareholders can use their stakes and voting power to force changes in companies' ESG practices. "A lot more clients in times like these, when they have concerns, want to feel a little closer to their investments. They want to know more [about] what's going on with the management of their companies," says Reynders.

Chris Brown, Pax World's chief investment strategist, sees a lot of money coming in from deferred compensation plans from various states. "Municipal employees are demanding to have some kind of SRI/ESG fund in their menu," he says. "All the governance problems that have come up and all the environmental issues have driven tremendous demand for our products."

What's more, Keefe at Pax World thinks investing in socially responsible companies is a smarter long-term strategy because companies that meet higher ESG standards tend to be better positioned for long-term performance and carry lower risk.

Bogoslaw is a reporter for BusinessWeek's Investing channel.