Bonds should be a part of any investor's portfolio and investors have a lot of choices today with specialty bond funds, such as SRIs. However, does an investor have to forsake good returns to invest with their conscience? Here is a set of criteria to evaluate current SRI bond funds on all fronts.
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Making Your Money Greener
Investors try to balance their portfolios with bonds to generate reliable income as well as to create a hedge against the volatility of stocks and commodities. For the socially-minded investor, this also means making important investment decisions based on objectives that include a set of values.
Socially-responsible investors (SRIs) want their returns to be greener not only in a monetary sense but also in terms of making the world greener and safer for future generations. Primarily, socially responsible investing has come to mean evaluating and selecting companies based upon universally recognizable standards that promote the health of the environment and the safety and dignity of the individual.
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Top Considerations in Evaluating Bond Funds
In evaluating a bond fund, investors should pay close attention to these factors that affect the risk and reward continuum and the appeal of the fund to investors.
1. Investment strategy - Measures how closely the fund's objectives align with the values held most important by the investor. Some of the common themes found in socially responsible investing are the:
Promotion of sustainable development policies - Is the business Involved in the production of alternative energy sources that will reduce the world's carbon footprint? Is the business actively pursuing or promoting a do no harm policy to preserve the environment?
Nonsupport of vices - Is the business or any of its subsidiaries involved in the production or promotion of vices such as gambling, pornography, alcohol, tobacco, etc.?
Nonsupport of warfare - Is the business engaged in supplying the military with weapons or equipment needed to engaged in war and conflict?
Advancement of fair labor and human rights - Has the business engaged in fair labor and nondiscriminatory business practices and avoided the exploitation workers in countries that have no or weak labor protection laws?
Support of family-based policies - Is the business known as a family-friendly place to work? Do they have liberal policies regarding maternity and family leave?
2. Performance - A fund's realized returns normally measured as yield to date (YTD) or at specific intervals of one, three, five, and ten years. For bonds a yield to maturity (YTM) analysis is considered useful because it gives a better approximation of the bond fund's projected annualized return.
3. Costs - The out of pocket expenses that include purchasing costs and annualized expenses in the form of management fees.
4. Risks - Analogous to the credit worthiness of the fund's portfolio and the average duration of its holdings. Shorter duration bonds are less sensitive to interest rate changes and therefore considered less risky. The percentage of Investment grade bonds versus junk bonds also determines the fund's overall risk.
Using these criteria, let's look at how two pure play SRI bond funds (Calvert and Domini ) stack up against each other.
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Calvert Bond Portfolio (CSIBX)
Investment Strategy: The Calvert fund invests at least 80% of its net assets in fixed-income securities. The fund invests principally in bonds issued by U.S. corporations and by the U.S. government and its agencies. The portfolio is weighed heavily towards industrials and banks.
Performance: The fund's performance as of July 28, 2011, was 2.91 percent YTD with a YTM of 16.46%.
Costs: There is a 3.75 percent sales charge with an annual expense ratio of 1.14%. The minimum investment is $2,000 or $1,000 for an IRA account and $250 for subsequent investments.
Risks: Ten percent of its portfolio is currently rated AAA and at least 65% of the Fund’s net assets are invested in investment grade debt securities rated A or above. This intermediate bond fund has an effective duration of 3.72 years.
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Domini Social Bond Fund (DSBFX)
Investment Strategy: Domini invests at least 85% of assets in intermediate-term, investment-grade fixed-income securities, including government agency, corporate, mortgage-backed and asset-backed securities, taxable municipal bonds, and U.S. dollar-denominated bonds issued by non-U.S. entities. The Fund social goals include investing up to 10% of its assets in debt instruments and other investments that provide a high level of community impact. The Fund's portfolio is weighed more heavily towards government issued bonds than corporate bonds.
Performance: The year to date performance as of July 28, 2011 is 2.08%.
Costs: The minimum investment is $2,500, $1,500 for an IRA account, and $1,500 with an automatic investment plan. This is a no load fund with no front or back end sales charge. The current expense ratio is .95 percent, but additional fees of .38 percent will kick in after November 30, 2011.
Risks: Approximately 49 percent of the fund's holdings are in U.S. government agency mortgage securities, which have traditionally provided investors with a greater guarantee from the risk of default. The average credit rating is AAA with an effective maturity is 4.9 years.
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Create Your Own Bond Fund
You don't have to invest in a pure SRI bond fund to invest responsibly in bonds--you can go the direct route and develop your own portfolio that includes individual bonds of corporations and governments.
Many municipalities issue bonds for specific altruistic purposes, including construction or expansion of public schools and universities, pollution abatement facilities, local hospitals, and parks. To see what corporations meet your social criteria, a stock screener can help you navigate your search. After evaluating a company's future growth rate and existing debt ratio, you will then be ready to purchase its bonds in the secondary market through a broker.
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References and Credits
Calvert Investments, http://www.calvert.com/fundprofile.html?fund=916 accessed July 29, 2011
Domini Investments, http://www.domini.com/domini-funds/Domini-Social-Bond-Fund/index.htm