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Fund Spy: Morningstar Medalist Edition

Socially Conscious Medalist Funds

These are the cream of the crop among funds that invest sustainably.

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Investor interest in sustainable investing is on the rise. The 2014 US-SIF Report on U.S. Sustainable, Responsible and Impact Investing Trends reported $6.57 trillion invested in this manner, a 77% increase over 2012. This growth has come with an evolution in approach and terminology. What used to be called socially responsible investing--avoiding such investments as alcohol, tobacco, and gambling stocks for ethical reasons--is now increasingly known as sustainable investing, with much more emphasis on environmental, social, and governance, or ESG, factors that could have material impacts on a company’s long-term success. Sustainable or ESG funds typically look for investments that score well in areas like environmental sustainability, employee relations, and corporate governance.  Many also engage directly with companies to improve their performance in these areas.

Though sustainable investing is dominated by institutional investors, the number of sustainable mutual funds in the U.S. has grown to more than 100. Last year we surveyed the field, discussing the various types of ESG funds, but even with such a survey it can be tough to sort through the bewildering array of options. That’s where the Morningstar Analyst Rating comes in handy. Out of more than 100 funds that Morningstar classifies as socially responsible, our analysts cover eight, and the four below earn medals, two of them Silver and two Bronze.

 Neuberger Berman Socially Responsible (NBSRX)
Morningstar Analyst Rating: Silver
A team led by Arthur Moretti has managed this fund since 2001 and the very similar  Neuberger Berman Guardian (NGUAX) since late 2002. Both funds have concentrated portfolios of 30-40 stocks that combine good growth potential with reasonable price tags. Unlike Guardian, this fund screens out alcohol, tobacco, weapons, nuclear power, and gambling and favors firms with good community, environmental, and workplace records; however, the two funds typically share most of their holdings, because the screening criteria are things that Moretti likes to see anyway from an investment perspective. This fund sports an excellent long-term record, with returns that have beaten the Guardian fund and trounced the large-growth Morningstar Category over Moretti’s tenure, despite occasional short-term stumbles. A relatively cheap price tag (0.86% for the Investor share class) adds to its charm.

 Parnassus Core Equity (PRBLX)
Morningstar Analyst Rating: Silver
This is another excellent ESG core fund, similar in many ways to the Neuberger fund. Like Moretti and his team, managers Todd Ahlsten and Ben Allen maintain a concentrated portfolio of around 40 stocks, but they put less emphasis on growth and more on stability and sustainable competitive advantages, so that the fund is in the large-blend category rather than large-growth. They use a fairly typical combination of positive and negative ESG criteria, and they believe that companies meeting these criteria tend to be superior long-term investments anyway. Since Ahlsten began managing the fund in 2001 its returns have ranked near the top of the large-blend category with significantly less volatility than its average peer. Like the Neuberger fund, it’s also relatively inexpensive.

 Vanguard FTSE Social Index (VFTSX)
Morningstar Analyst Rating: Bronze
In contrast to the first two funds, in which stock-picking is paramount, this is an index fund with more than 400 stock holdings. It tracks the FTSE4Good US Select Index, which eliminates alcohol, tobacco, gambling, nuclear weapons, and adult entertainment, as well as firms with poor environmental, human rights, or labor records. Those criteria have led the fund to be overweight relative to the Russell 1000 index in the technology, health-care, and financial sectors, and underweight in energy and industrials. Returns have been respectable but not great over the past 10 years, but what really sets the fund apart and earns it its Bronze rating are its rock-bottom expense ratios: 0.27% for the Investor shares and 0.16% for the I shares.

 TIAA-CREF Social Choice Equity (TISCX)
Morningstar Analyst Rating: Bronze
This is not technically an index fund, but it holds about 800 stocks, twice as many as the Vanguard fund, and is designed to replicate the sector weightings and other risk characteristics of the Russell 3000 benchmark. It only holds stocks that score well on a group of five broad ESG criteria, including environmental stewardship, human rights, labor relations, product quality and safety, and ethical management. It has been a solid long-term performer, beating more than two thirds of the large-blend category (including Vanguard FTSE Social Index) over the past 10 years and outpacing the S&P 500 benchmark over the past 15 years. And though it’s not quite as cheap as the Vanguard fund, all four of its share classes rank in the cheapest quintiles of their peer groups, with the Retail shares (minimum investment $2,500) costing 0.46% and the Institutional shares costing 0.18%.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.