Indexing isn't what it used to be, say decision-makers at Domini Social Investments
. The Domini Social Equity Fund
, launched in 1991 as the world's first socially and environmentally screened index fund, plans to switch to active management later this year -- in spite of higher fees -- pending shareholder approval.
"It is a significant change for us, and a difficult decision," said Adam Kanzer
, general counsel and director of shareholder advocacy at Boston-based Domini. Over the past two decades or so, "it's gotten to the point where index funds are really about price," he said. "Our fund was not really priced as an index fund."
The fund has a portfolio of about $1.5 billion, according to Kanzer. It currently follows the Domini 400 Social Index
, put together by company founders Amy Domini
, Peter Kinder
and Steve Lydenberg
, and made up of mostly large-cap stocks that meet the firm's social and environmental screening criteria. Intended changes -- outlined in an SEC filing
of last Thursday -- would see the fund subadvised by Wellington Management Company
One reason for the switch was difficulty competing with larger companies on pricing. "We don't see this as a grand pronouncement about indexing ... Indexing is a great strategy, but a better strategy for firms with greater assets under management," Kanzer explained.
However, he said, the primary motivation for change was witnessing how Domini's socially responsible criteria seemed to lead to strong stock selections -- and how the constraints of indexing prevented the fund from taking advantage of those winners.
"We saw, over and over again, here were some great stock picks that were being undercut by our need to have a market-cap weighted portfolio, and that was a real struggle," he said.
Wellington already works with Domini on the actively managed Domini European Social Equity Fund
, launched in 2005. In the course of an RFP put out for that product, Kanzer said, Domini looked not only at bidders' size, experience, and compliance record, but also at their ability to work with Domini's social and environmental screens. "We still remain 100 percent committed to that approach," he added.
Wellington impressed enough to get the contract, and now Domini is betting the company's managers have the skills to enhance the value of the Social Equity Fund -- and by enough of a margin to offset increased management fees. Domini's screening process will be combined with Wellington's brand of diversified quantitative stock selection. If approved in August, the leap will be made next November 30.
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