Socially responsible investing (SRI), however one defines it, has been getting serious traction from investors in recent years. But do you, or your clients, really know where those SRI dollars are going? It’s a question worth asking.
Take Pax World Management, investment adviser to Pax World Funds, and one of the oldest and most respected names in socially responsible investing. Just last week, Pax settled a 4-year investigation with the SEC to the tune of $500,000. The charges? Negligent conduct in two of its mutual funds—specifically, failing to screen some stocks and in some cases investing in stocks that failed screens. The firm settled with the SEC without admitting or denying guilt.
The SEC alleged that from 2001 through 2005, two of the asset managers’ smaller funds, Pax World Growth Fund (PXWGX) and Pax World High Yield Bond Fund (PAXHX) together failed to screen 41 stocks and bonds for the funds’ stated socially responsible criteria. In addition, 10 stocks actually failed the screens but were bought for the funds’ portfolios anyway. According to the SEC, this is the first time an SRI fund has been dinged for not following through on its stated investment objective.
The question is, will the snaring of such a respectable SRI asset manager hurt the credibility of other SRI funds? Probably not, say analysts, but it’s too early to say for sure.
Morningstar tracks 96 SRI funds that invest using a variety of screens whether it’s a religious fund that avoids companies in industries like pornography and alcohol or a green fund that invests heavily in alternative energy. Total assets in those funds are $47.6 billion, up from $21.8 billion in 2002. For more on the confusing, complicated and growing universe of SRI, see Registered Rep.’s August cover story, titled “What-I-Believe-In Investing”).
Morningstar analyst Bill Rocco says he doesn’t think the news will hurt the growth of SRI, or even Pax, over the long-term, if his recent discussions with SRI investors are any indication. “While it’s clearly bad news, the good news is that it wasn’t the flagship fund [Pax World Balanced (PAXWX)] and that the managers of those two funds are now gone,” says Rocco.
Indeed, Pax’s reputation is staked to Pax World Balance, which accounts for $2.4 billion of its $2.6 billion in total assets under management. And Pax CEO Joseph Keefe—who arrived in May 2005 after the conduct had occurred—has made it pretty clear he won’t tolerate such impropriety. In fact, not only are the two fund managers gone, but Keefe also threw out the head of the Social Research department as well as the chief compliance officer and the firm’s outside counsel. In his letter to shareholders, written the day before the SEC announcement, Keefe notes that Pax World Balanced is clean as a whistle and still prospering and that the SEC gave Pax a nod for cooperating fully with the investigation.
Morningstar’s Rocco thinks Pax and SRI will continue to prosper: the World Balanced Fund is a Morningstar “analyst pick” and a top long-term performer. “It’s disappointing and it’s unacceptable, but when you think of good SRI shops, Pax is one of them,” he says.
