Can investing in small companies be sustainable and profitable?
Introduction
The number of investors in mutual funds who want to integrate their social values into their investment approach is increasing. Environmental, social, and governance (ESG) criteria provide a framework to help them achieve this. As the name suggests, the ESG screening process identifies companies that have built sound environmental practices, strong social responsibility principles, and ethical governance initiatives into their corporate policies and daily operations.
ESG-Compliant Mutual Funds for Small Companies
Here’s a summary of five small mutual funds that receive high ratings overall from Morningstar analysts. They are presented according to those ratings, in descending order from five stars.
Calvert Small-Cap A Fund (CCVAX)
This fund from Calvert Research and Management, a mutual fund manager compliant with ESG that started operations in 1976, receives a high five-star rating from Morningstar analysts. The fund invests at least 80% of its shares in smaller, lesser-known companies in the Russell 2000 index, which measures the performance of 2,000 small companies trading in the United States.
Shelton Green Alpha Fund (NEXTX)
Morningstar also gives this fund its top rating of five stars. The fund’s capital holdings may lean towards medium-sized companies and even some large companies, while maintaining a focus on the potential growth from green economy companies. The fund is compared to the MSCI ACWI Investable Market Index, which includes over 9,000 companies globally.
Parnassus Mid-Cap Fund (PARMX)
Although this fund is not technically a small-cap fund, it contains some small-cap holdings. The Parnassus Small-Cap Fund (PARSX) has been merged into PARMX, which has a five-star rating from Morningstar. The fund typically invests at least 80% of its net assets in medium-sized companies and may invest up to 20% of its net assets in small and large companies. The fund seeks to outperform the Russell Midcap index over the long term while protecting investors in downturns.
Pax Small Cap Fund (PXSCX)
This fund, which has a three-star rating from Morningstar analysts, is managed by one of the most experienced ESG-compliant mutual fund companies in the United States, Pax World Funds, which began in the 1970s. The Small-Cap Investor Fund was launched in 2008 and claims to focus on high-quality small companies at reasonable prices. The fund’s standout returns were nearly 80% for the period ending March 31, 2021, although its performance in 2021 so far has been more moderate at 13.69%. Over the long term, its performance over three, five, and ten years has averaged around 10%, often trailing the Russell 2000 by a few percentage points. This fund, which has approximately $570 million in assets at the end of the first quarter of 2021, holds fossil fuel-free shares, according to Pax World Funds. The fund’s cost ratio is slightly above average at 1.2%.
Praxis Small-Cap Index Fund Class A (MMSCX)
The fund aims to mirror the performance of the small-cap stock market in the United States by tracking the S&P SmallCap 600 index, but it applies ESG screening to its investment process and commits 1% of its assets to “community development.” While most of its allocation is dedicated to small companies, its top holdings include GameStop and Macy’s. This fund, which achieved a three-year performance of 11.27% (13.3% for the no-load share class) compared to 13.71% for the S&P SmallCap 600 index, earned a two-star rating from Morningstar. The fund’s expense ratio of 1.12% is costly for an index fund, and you should consider a 5.25% sales charge unless you choose a no-load fund. The fund also charges an annual fee of $25 for accounts under $5,000 and requires a minimum investment of $2,500.
The Future
Sustainable Joint Investment for Socially Responsible Small Businesses
Morningstar states that sustainable joint investment practices gained momentum in the early millennium, but they have their roots in investment screening processes that have been conducted for generations to comply with religious and ethical beliefs. In the 1970s, anti-Vietnam War protesters began advocating for socially responsible investing, and the first sustainable mutual funds were established. A common concern regarding adherence to sustainable mutual investment principles is whether this choice leads to returns that lag behind broader market indices.
Morningstar compiled the net returns of all equity and bond funds that had a sustainability rating as of December 31, 2019. It reported that when compared to the index funds they track, sustainable funds with lower ESG risk tend to outperform their own index more frequently than sustainable funds with greater exposure to a larger amount of risk.
Although assessing the return of a single year is not sufficient to measure the long-term impact of sustainable investing, Morningstar notes that further analysis is necessary to accurately measure the relationship between ESG risks and investment performance.
While many mutual fund investors prefer to invest only in companies that reflect their values, it is also beneficial to diversify investments by investing in approved large-cap companies in addition to mid-cap and small-cap firms.
Source: https://www.thebalancemoney.com/socially-responsible-small-cap-mutual-stock-funds-3025634
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