Funds that take a stand

(Editors' note: Vicki Lee Parker's Savvy Consumer column will return next week. Amy Baldwin writes "Out of the Red," a column about personal finance for 20- and 30-somethings, for our sister paper The Charlotte Observer.)

There's value investing and then there's values investing.

The former, according to investorwords.com (one of my favorite online reference sites), has to do with selecting "good stocks at great prices." The latter -- today's Out of the Red topic -- is about investing according to your values.

With midterm elections two days away, values are hot-button issues. If you have social or religious principles you try to live by, not only can you vote accordingly but chances are you can invest by them, too. Socially responsible mutual funds ("SRI funds" for short) let investors put their money where their hearts are.

Last month, one such fund with a political twist opened: The Blue Fund.

Opened Oct. 17, the Blue Fund invests only in companies that treat their workers, environment and community well and gives money to Democrats, said Daniel de Faro Adamson, co-founder and CEO of Blue Investment Management in New York.

The first SRI funds were those that focus on companies that their managers think have the best practices when it comes issues such as the environment, employee relations and community involvement. They often avoid tobacco, alcohol and weapons companies. The prototype is the Domini Social Equity fund, started in June 1991. Fund heavyweights Vanguard Group and TIAA-CREF started their own SRI funds about a decade later.

The Blue Fund shuns tobacco and firearms companies.

There also are religious-based funds. Islamic funds, such as the Amana funds, avoid financial companies, because of the religion's stance against making money from interest. Catholic funds, such as the Ave Maria Catholic Values Fund and the Aquinas fund family, screen out companies connected with abortion, contraceptives and stem-cell research.

There are two Blue Funds -- one invests in large-capitalization companies found in the Standard & Poor's 500 and the other in small-caps in the Russell 2000. For admission into either, companies must give more of their political contributions to Democrats than Republicans, said Adamson, 30.

What's in: Apple Computer, Google and Starbucks, all of which give 98 percent of their political donations to the Democrats, he said. Some examples of excluded companies are Dell, Halliburton and Exxon Mobil, which give just as much to the GOP.

"The purpose of the fund -- it's an opportunity for progressives to invest with both a social and political conscience," Adamson said.

Adamson believes that being a good business -- in terms of social values -- is good business. Many of Google's best ideas come from employees who are given the freedom of unstructured work time, he said.

And, he said, Starbucks boasts one of the highest retention rates in the retail industry in large part because it provides employees with superior health-care coverage.

Republican funds

I looked for a "red" mutual fund -- one that invests along GOP party lines -- but didn't find one. What to do? Invest in everything else. After all, the vast majority of the market is "red" -- 380 companies in the S&P 500 by the Blue Fund's standards. (Of the remainder, 76 are "blue" and 44 are "neutral.")

And, keep in mind, socially responsible mutual funds -- conservative- or liberal-minded -- make up a very small portion of the fund universe. Of the $6.6 trillion invested in mutual funds, only $42.5 billion, or 0.6 percent, is in SRI funds, according to Morningstar, a Chicago-based firm that tracks stocks and mutual funds. Another option -- the anti-SRI fund -- is the Vice Fund, which is big on alcohol, tobacco, firearms and gambling, most of which would be screened out of many SRI funds.

But does screening out companies or certain sectors hurt investors' bottom line?

Adamson said it doesn't.

His firm says the proof it the five-year total return, through June, for the 76 "blue" companies currently in the S&P 500 and in the large-cap Blue Fund. It was 139 percent, compared with 34 percent for the entire current S&P 500 and 19 percent for the index's current "red" components.

Hot stocks skew result

Of course, when you are looking at a smaller group of stocks, a couple of stocks' spectacular returns -- good or bad -- have a bigger impact on the group overall. Among the "blue" companies are Apple, which had a total return for that five-year period of 379.3 percent, and Google, which returned 309.6 percent between going public in August 2004 and last June -- the cut-off for the Blue Fund's five- year period. Likewise, you could say the Blue Fund could have a bigger potential downside than the overall S&P.

Past performance of SRI funds that have been around several years is mixed, which could be said of any investment sector.

The Vice Fund, in its fourth full year, has consistently beaten its benchmark, the S&P 500, according to Morningstar.com. In 2004, its best year compared with the S&P 500, the Vice Fund posted a total return of 24.4 percent, compared with the index's 10.9 percent, according to Morningstar.

But the Domini Social Equity Fund has lagged the S&P 500 for the past three years and is on track to do the same this year.