Smith Barney Inc. has become the first national brokerage firm to offer a "socially responsible" mutual fund that gives the cold shoulder to manufacturers of weapons and cigarettes, among other products.
The firm said its Concert Social Awareness Fund avoids investing in companies that create "a negative social impact," citing the tobacco and defense industries and owners of nuclear power plants.
The Social Awareness fund, with $382 million in assets, is an adaptation of Smith Barney's Strategic Investor Fund, which had a three-year annualized return of 11.41% and a Morningstar rating of three stars at yearend.
Smith Barney, a unit of Travelers Group, is the largest of a growing number of investment companies to respond to the demand for funds with "socially responsible" investments.
There are 45 such funds, all of which were started in the past three years, said Steve Schueth, president of the Washington, D.C.-based Social Investment Forum, with 400 member investment companies.
The industry has "seen quite a lot of growth in socially responsible funds - tremendous growth," said Mr. Schueth, who is also president of Calvert Distributors, a unit of Bethesda, Md.-based Calvert Group, the largest provider of such funds. Calvert Group has eight "socially responsible" funds, with $1.8 billion in assets.
Others fund companies offering a range of such funds include Citizens Trust, Portsmouth, N.H.; First Affirmative Financial Network, Colorado Springs; and Progressive Asset Management, Oakland, Calif.
In addition to producers of tobacco, liquor, weapons, and the like, such funds often avoid the stocks of companies with poor labor or environmental records, Mr. Schueth said.
He describes the process of identifying socially responsible companies that perform well on the stock charts as finding "the double-bottom line."
"We find that progressive companies in the long term perform better," said Mr. Schueth.
Mutual funds have traditionally poured billions of dollars into "sin" stocks, including tobacco companies. Through 1995, Fidelity Management and Research Corp., the Boston-based fund company, was the largest institutional shareholder in both Philip Morris and RJR Nabisco, with a total of $17 billion invested.
But increasingly, the stocks have become a lightning rod for shareholder activists, who attack health issues, smoker liability and, now, mediocre stock performance. Tobacco stocks, not surprisingly, have never been popular with investment organizations - such as the mighty Lutheran Brotherhood - that have religious affiliations. But now Maryland has become the first state to drop tobacco stocks from the portfolio of its state employees pension fund, and Florida may follow suit.
Fund managers often avoid moralizing when describing the process of selecting socially responsible funds. The focus is on profits, not preaching.
"We avoid alcohol and tobacco (stocks) for health reasons, because of our insurance side, to keep members alive. With gaming, we just don't feel comfortable investing in that area," said David Rustad, spokesman for the Minneapolis-based Lutheran Brotherhood, which has $3.7 billion in assets in seven proprietary mutual funds. With the insurance business, the organization has $18 billion in assets.
Indeed, fund companies are finding it's good business to offer the funds.
"That's exactly why Smith Barney is offering it," said Jason Huntley, director of institutional services at First Affirmative Financial Network, which specializes in "tobacco-free investing."
"Everyone has their own social or moral code, so it's a growing area" for investment firms, he said.
Not everyone has rushed to embrace the concept. Thus far, no banks offer proprietary socially-responsible funds. "We do a lot of business with broker-dealers, but very little so far with banks. Banks have not shown the same interest," Mr. Huntley said.