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All Canadian investors have a unique objective when creating their portfolios.  Usually, such objectives could be a need to preserve capital, achieve rapid growth, or perhaps provide a source of income.  In the past few years, as talk about protecting the environment has grown, a new investment objective has emerged.  Investors are now seeking funds that invest in companies that are labeled ‘socially responsible'. These are firms that look to benefit the environment and society as well as their shareholders.

For fund managers of socially responsible funds, the style process is rather similar to that of your typical mutual fund.  The main difference is the first step, which is referred to as negative screening.  This is where the manager begins with the normal universe of stocks and bonds, and eliminates those that do not meet their standards regarding their environmental and social objectives.  From there, the fund would go through its regular analysis, such as a top-down or bottom-up approach.

In Canada, the boom in socially responsible funds has yet to really catch on, despite the increased attention and awareness given to environmental issues.  The most prominent fund families for Canadians looking to buy these funds are managed by Ethical Funds. Acuity also has their Social Value funds, as well as PH&N's group of Community Values funds.  Aside from these fund families, and a few recently created funds focusing on alternative energy sources, socially responsible fund offerings are few and far between.

One thing that caught us by surprise was the modest growth in these funds, measured by total assets under management. In the table below, we will show you Canada's largest socially responsible funds. On top of that, we are going to compare their assets under management today with their total assets five years ago, as well as the return earned by those fund's investors of that time span.

Table I: Canada's largest socially responsible mutual funds

Data as of January 31, 2008

Source: Fundata Canada Inc.

As you can see here, over the past five years, some of these funds have seen very little growth in their asset bases.  Five years ago, the ten largest funds in this category had about $1.6-billion in total assets.  Today, that total has risen to $2.3-billion, for an annual growth rate in the 5-6% range. Compare that to the total Canadian mutual fund industry, which has seen total assets rise at about 12% per year over the same period.

Two funds on this list standout as showing outstanding growth rates. Those two would be Ethical Canadian Dividend and Ethical Special Equity.  Ethical Canadian Dividend has risen from close to zero to close to $263-million today.  The Ethical Special Equity Fund has also seen its assets rise rapidly, growing from $100-million to $280-million during the last five years.  The other common link between these funds has been their excellent performance.  Both funds have performed at or near the top of their peer group during this decade.  Not only that, but the Ethical Special Equity fund has now received the Canadian Investment Award for best Canadian Small/Mid Cap Equity fund.  With that in mind, the rapid growth seen in these two funds may have been a result of their stellar performance figures, not just because of their socially responsible mandates.

During the past couple of years, there has undoubtedly been a shift in peoples' awareness about the environment and socially responsible investing.  As far as cash flows into these funds are concerned, the big shift has yet to take place.  We feel that this is caused by two main factors - one being the lack of choice in this category of funds and the other being that investors may fear that socially responsible investments will be a drag on their portfolio's performance.  Those impacts will likely subside, as more prominent fund companies and banks are beginning to provide socially responsible funds as investor interest in them grows.  Concerns of performance will also fade away, now that there are actual results showing a socially responsible fund not only outperforming its benchmark, but many of its peers as well.  While the sector has yet to really take off here in Canada, this is likely to change in the near future.

Fundata Canada Inc, a leading source of Canadian mutual fund information. For more information, please visit www.fundata.com.

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