It’s often said that expense fees charged to investors by socially responsible mutual funds are generally higher than those assessed by other actively managed mutual funds. But in fact the evidence is too thin to make that determination one way or another.
Expense fees are levied by fund companies to cover the costs of running a fund. They include the investment advisory fee, administrative costs and other operating expenses. The measure that is used to compare the cost of owning shares in one fund vs. another is called the expense ratio.
Investors should be aware of the costs charged by fund companies and not just how well the fund has appreciated, because that fee reduces the total return on their investment.
According to Morningstar Inc. the average expense ratio for all the non-socially responsible investing funds in its database is 1.26 percent, compared to a 1.18 percent average expense ratio for SRI funds. But Michael Herbst, socially responsible fund analyst for Morningstar advises taking that comparison with “a grain of salt.” That’s because socially responsible funds are not represented in many of the more costly categories, such as some of the specialty categories.
In fact of the 68 fund categories followed by Morningstar, socially responsible funds are in 28. These include large, mid and small cap funds; blend, growth and value. They include some foreign funds and some specialty funds in real estate, technology and natural resources. And the list includes a few bond fund categories.
What the research shows is that there is no distinct trend. Some SRI funds are cheaper by relatively large amounts. The average expense ratio for SRI large cap value funds is 1.07 percent. Among all non-SRI large cap value funds it is 1.29 percent. For mid cap value funds the average expense ratio for SRI funds is 0.93, while that figure among non-SRI funds is 1.38 percent.
But there are fund categories in which social investing is more expensive. The average expense among non-SRI foreign large cap growth funds is 1.54 percent. But among social investing funds it leaps to 2.09 percent. The average fee among mid-cap growth funds is 1.49 percent, but 1.66 percent for social investing funds.
Herbst points out that you’ll find “outliers” on both sides when you turn to individual funds. The Winslow Green Growth Fund’s 1.45 percent expense ratio is higher than Morningstar’s 1.21 percent average fee for small cap funds; and the 1.60 percent expense ratio on the Domini European Social Equity Fund is above the 1.19 percent average expense for Morningstar’s Europe Stock category. Turning around, the Vanguard FTSE Social Index Fund has a 0.24 percent expense ratio, much lower than the 0.94 percent average for large cap funds.
Socially responsible investors differ from conventional investors by having a set of social, environmental or moral principles that they apply when selecting their stocks, bonds or funds. Otherwise they need to consider the same fundamentals as other investors. Limiting the corrosive effect of expense fees is one of those basics.