The SocialFunds.com website, which monitors the progress of socially responsible investing (SRI) and socially responsible mutual funds, recently reported that two SRI funds did exceptionally well during the first half of 2004. The Ariel (FUND:ARGFX) fund and Pax World Growth (FUND:PXWGX) fund advanced 11.8% and 10.6% in the first half of the year, respectively. Each outperformed more than 95% of its peers.
What makes these funds different from more conventional ones? Well, according to SocialFunds.com, "Both funds exclude companies that produce weapons, nuclear power, tobacco, and negative impacts on the environment, and both have positive screens for strong employment policies." But the Pax fund also avoids alcohol- and gambling-related firms, while Ariel's top holding was Caesars Entertainment (NYSE:CZR). Pax World Growth's top holding was Dick's Sporting Goods (NYSE:DKS). These holdings suggest that while the funds do strive to avoid firms that reflect social irresponsibility, they may have a hard time finding firms that exemplify social responsibility. Or maybe they're just not finding them at the right price.
The funds' performances may sound impressive, and you may be tempted to snap up some shares, but beware: Six months of good performance does not guarantee any kind of future performance. As the old saying goes, even a broken clock is right twice a day. (Of course, these funds aren't necessarily broken.)
Even one year's performance is to a great degree meaningless; the stock market is rather unpredictable over the short run. Great funds might be invested in great companies at great prices, but if those stocks don't advance over a short period, the fund won't look too good in that small window. It would be a mistake to pass it by, though. Likewise, with more than 5,000 funds in the fund universe, it's inevitable that some clunkers will have occasional bursts of outperformance.
The trick is finding funds that have a record of fairly consistently outperforming the market average. We can help you do so via our Motley Fool Champion Funds newsletter, which you can try for free. But if that seems like too much bother, you can do quite well just settling for average, via good old index funds.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
