Where did SRI come from?

It's difficult to say when socially responsible investing (SRI) began. However, there are two events that laid the foundation for investors to make the world a better place. The first was the creation of the Pax World Fund in 1971. The other was the Domini Social Equity Fund in 1991. Both still exist today.

The Pax World Fund was the brainchild of Luther Tyson who worked in Washington D.C. in the late '60s for the United Methodist Church. Tyson received a letter from a woman in Ohio who wondered if he knew of a mutual fund that would invest her money but not in any war-related industries. He looked around but couldn't find any so he left it alone.

A year later, after returning from Paris where he was an observer for the Vietnam peace talks, Tyson decided he needed to start such a fund himself. He convinced his coworker Jack Corbett to join him on this mission. They would provide investors with a place to put their money that reflected their own values and as shareholders would influence major corporations to be more socially responsible. The initial capital was $101,000 and today totals $2.2 billion with an annual return since inception of 9.4 percent. Pax Funds use a combination of negative and positive screening to produce their approved list of companies. The fund is actively managed, has a low turnover of holdings, and an expense ratio of .96 percent. In the latest 10-year period, it ranked 16thout of 218 balanced funds.

The Domini Social Equity Fund was created by Amy Domini and partners in 1991. Originally a stockbroker, Domini got the idea in 1980 for starting an SRI fund when a client asked her what to do with a holding she was opposed to for environmental reasons. Other clients spoke up about their particular concerns and soon Domini had written a book entitled Ethical Investing about her feelings on the subject. This grew into the Domini 400 Social Index that tracked 400 of the most socially responsible companies in the U.S. and was roughly comparable to the S&P 500. After two years promoting the index, they created an actual fund that tracked the index. It was passively managed until December 2006. The annual return since inception is 10 percent, slightly less than the 10.82 percent of the S&P 500.

A major concern with SRI funds is underperformance. The social screens used to eliminate any irresponsible companies often remove some of the better performing stocks in a portfolio. As investors become more familiar with this type of investment, it's hopeful that money managers will learn to outperform the markets within a more confined group of companies. After all, that's usually the reason you hire an investment adviser in the first place.

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