Investing with Your Heart

Almost from the time they were created 30 years ago, socially responsible mutual funds were routinely dismissed as the ill-conceived love child of trust-funded tree huggers and their spendthrift financial advisers. The conventional wisdom was that they didn't make much money.

But the times, they have achanged. Socially responsible investments (SRIs) are all the rage these days, and it turns out they are competitive with their less benevolent counterparts. Over the past five years, socially responsible funds that invest in large-cap companies earned an average 11.99% return. Regular large-cap funds managed 12.60%. While that's still a disparity, it's not huge, and to many, it's a small price to pay to make the world better. "SRI funds have gotten a bad rap," says Tim Smith of Walden Asset Management, a financial consulting firm that specializes in SRIs. "Over the long term, you really don't pay a conscience penalty to invest in what you believe in."

Making a difference and profiting from the experience have never been more popular. According to Morningstar, the amount of money invested in SRIs has grown 321%, from $9.5 billion in 2000 to $40 billion today. That growth rate easily outpaces the 21% asset growth for all stock, bond and hybrid mutual funds. Why are investors suddenly willing to put so much money where their morals are? Solid returns are key, says Walden. "When clients know they're going to get a strong return, they're much more willing to have their portfolio synch with their politics."

It helps that there are socially minded funds for nearly every religious and political persuasion. Five years ago, there were just 78 funds to choose from; now there are 222. For Catholics, there's the Ave Maria Catholic Values Fund, which invests in keeping with Vatican teachings on abortion, marriage and other issues. For Muslims, there's the Amana Growth Fund, which invests in firms that aren't involved in gambling, alcohol and other businesses considered out of step with Islamic principles. So far this year, it has posted an impressive 24.22% return. And for the environmentally minded, there's the Winslow Green Growth Fund, which posted a solid 20.40% return year-to-date.

With so many to choose from, picking an SRI that's in line with your values can be tricky. "There is no universal standard for what socially responsible really means," says Russel Kinnel, Morningstar's director of fund research. The Natural Capital Institute, a Bay Area research group, reported last year that some SRI funds invested in weaponmakers like Raytheon and in tobacco businesses like Altria (formerly Philip Morris). Says Kinnel: "Read your prospectus' fine print." It's also a good idea to think of SRIs as long-term investments. Why? Since they're typically underrepresented in oil and other stocks that are subject to price shock, they may under- or overperform depending on the season. And as with all other investments, keep an eye on fees. Know what you're getting into, and you might just do your portfolio and the world some good.