Green Century Gets It

September 08, 2006

Green Century Funds sticks with the Domini 400 Index, even as Amy Domini herself chooses active management; plus, cap gain concerns for Domini shareholders.

This summer, one of the indexing industry's heroine's - Amy Domini, creator of the world's first socially responsible investing (SRI) index, the Domini 400 - went over to the dark side.  As I explained in the Journal of Indexes, Domini asked shareholders in the $1.2 billion Domini 400 Index Fund to take a leap of faith off the cliff of active management, with the fund abandoning its index roots in favor of an active, quantitative strategy. As a kicker, Domini hiked expenses on the fund by 20 basis points.

You can see why Domini was itching for a change. SRI indexes like Domini's generally underweight energy stocks, and with the strong performance in the energy patch over the past few years, they have lagged the broader market. Underperformance can be tough to stomach.  But history - and common sense - suggests that discipline, not performance-chasing, is the best long-term approach.

"If you're looking for better returns," I wrote in my article, "don't embrace the dark side of active management. Try lowering your fees instead."

Well, it sounds like someone was listening.

For years, the Green Century Equity Fund has had an unusual "layered" fund structure, whereby it held shares in the Domini 400 Index Fund as a way of tracking the Domini 400 index. This unfortunate layering was necessary because Domini had an exclusive license to track the index; buying shares in her fund was the only way to access the popular benchmark.

When Domini switched to active management, Green Century's board of directors had a choice to either follow her or switch to a new structure and continue to track the index. Fortunately, they made the right choice.

"We could have continued to track their fund as an active management style, but we decided it was in the best interests of our shareholders to stay invested in the oldest and best-known SRI index in the country," said Erin Gray, marking analyst for Green Century, in a recent interview on "


In a real coup - and one that deserves to be commended - the board also slashed the expense ratio for the fund from 1.5 percent to 0.95 percent, to reflect the "de-layering" of the fund structure.  I will be the first to admit that 95 basis points is a lot to pay for an index fund, but it is on par with what Domini charged for her index fund. (In related news, Green Century also slashed the expense ratio on its balanced fund from 2.38 percent to 1.38 percent.)

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