Social funds rebound

For some investors, ethics takes precedence over profit. That’s why they eschew traditional fund companies in favour of those that offer products that use social principles in selecting securities for their portfolios.

In recent years, this preference has cost socially-responsible investors money. With a few exceptions, these funds have lagged behind their less-ethically inclined peers. But now the pendulum appears to be swinging back.

Corporate Knights magazine recently published a survey of Canadian socially-responsible investments (SRI) in which it found several that it deemed worthy of recognition. Topping their list for combining performance with social responsibility were the Ethical Canadian Dividend Fund and the Meritas Jantzi Social Index Fund. The Ethical group dates back to January 1986 with the launch of Ethical Growth Fund, the first SRI fund in Canada. The company is well-known to anyone who deals with a credit union. Meritas is a newcomer which launched five SRI funds in early 2001.

Ethical now offers 14 stand-alone funds, plus four portfolios under the Credential name. Some of its funds are still sub-par performers, but there are a few andouts in the group as well. The Canadian Dividend Fund that was honoured by Corporate Knights is one of the company’s latest additions, having been launched in October 2002. It posted a one-year gain of 23.6 per cent for the period to Jan. 31, above average for its category. The fund is really a blue-chip stock fund and distributions are small. Among the major holdings in the portfolio are Nexfor, a forest products company, Investors Group, AltaGas Services, Great-West Life, and Fortis.

In my view, the stand-out fund in the group from a performance perspective is Ethical Special Equity, a Canadian small-cap fund. It shows above-average returns for all time frames from six months to five years with below-average risk. The fund’s three-year number is especially impressive; the average annual gain of just under 31 per cent is almost triple the average for the category.

Another good choice is Ethical Income, a steady bond fund that ranks in the second quartile of its category in most years. Its latest one-year gain was 7.4 per cent and it has made a profit in every year but one since 1996.

The Meritas Jantzi Social Index Fund broadly follows the performance of the JSI, which tracks the performance of 60 Canadian companies that pass a set of broadly-based social and environmental screens. However, Meritas goes beyond Jantzi to also screen out companies involved in alcohol, gambling, and pornography. The fund posted a one-year gain of 34.8 per cent to Jan. 31, better than average for the Canadian Large-Cap category.

Mackenzie Universal Sustainable Opportunities Capital Class was also singled out for special mention but I am not very impressed by it from a performance standpoint thus far. The fund’s latest one-year gain was 17.9 per cent, well below average for the Global Equity category. However, it has been in existence for less than two years so perhaps that will improve.

The Acuity Clean Environment Global Equity Fund is producing much better results right now if you are looking for a global fund to add to your socially-responsible portfolio. It gained 27.5 per cent in the past 12 months. But be cautious with this one. It posted huge losses in 2001 and 2002 and its history shows a high degree of volatility. The same caveat applies for the Acuity Clean Environment Equity Fund, which is coming off a huge year during which it advanced 42.5 per cent. Prior to that, however, the fund finished in the red four years out of five from 1998 to 2002.

One of the older socially-responsible funds, Investors Summa, is also staging a comeback. It used to be a top performer (first or second quartile from 1997 to 2000) but, like the Clean Environment funds, it struggled in 2001-02. A new management team, Dan McClure and Keith McLean, took over in mid-2003 and they appear to have this one back on track. The fund gained 32.4 per cent in the year to Jan. 31 and has consistently been ahead of the averages in recent months.

Investors with $25,000 in their pocket (that’s what it takes to open an account) might want to take a look at the four Community Values funds launched by Phillips, Hager & North in the fall of 2002. They combine PH&N’s money management ability and low fees with a focus on companies that are deemed to be socially responsible.

The PH&N Community Values Canadian Equity Fund is off to an especially strong start. It posted a 32.5 per cent gain in the latest 12-month period, some 10 percentage points better than the category average. The PH&N Community Values Balanced Fund also looks good, with a one-year gain of 18.9 per cent. Only the Community Values Global Equity Fund underperformed its peer group.

As you can see, there are several worthwhile choices in the SRI fund universe. Once again, they’re proving that social values and profits do mix. Consult a financial advisor before making any purchase decision.

This article originally appeared in Mutual Funds Update, a monthly electronic newsletter of common sense mutual fund advice edited by Gordon Pape. For subscription information, go to