The SEC has fined a well respected Mutual Fund manager for allegedly violating its own investment policies.

The Wall Street Journal article Pax Funds Strayed From Its Mission reports that Pax World Management Corp., one of the best-known “socially responsible” investment firms, settled SEC charges that it violated its own rules against purchasing shares in companies involved in such businesses as defense, alcohol, tobacco and gambling.

The SEC alleged that, from 2001 through 2005, Pax World Growth Fund and Pax World High Yield Bond Fund failed to screen 41 stocks and bonds at all to see if they met socially responsible criteria.  Pax agreed to pay a $500,000 fine to settle the charges.

ETFs Do a Better Job of Staying on Target

Unlike mutual funds, exchange traded funds (ETFs) are less likely to stray from their mission because the vast majority of them are tied to an index.

KLDThe index composition is typically set by a committee in a public fashion and changes are announced before implemenation by ETF managers.  That compares to the typical mutual fund which selects holdings behind closed doors and discloses them only a few times a year.

The tracking error of ETFs is closely watched each trading day and is self-correcting.  Mutual funds can stray from their investment policy for long periods of time. In Pax’s case, the alleged violations go back to 2001.

Socially Responsible Investing is Possible with ETFs

Exchange traded funds provide investors with a way to build a socially responsible portfolio.  The KLD 400 Social Index Fund (DSI) invests in companies that KLD determines have positive environmental, social and governance characteristics.

The KLD Select Social Index Fund (KLD) invests in large capitalization companies that KLD determines have positive social and environmental characteristics, while at the same time maintaining risk and return characteristics similar to the Russell 1000 Index.

KLD is KLD Research & Analytics, a provider of social research and indexes for institutional investors.